Now, let's talk about how do we increase your home's equity. So the reason why we want to increase the equity in your home is that equity is the cash value that you have in your house. It's the money that you're able to take and go used to invest in something else, or it's the money that you're going to get as a check when you sell your home.
So if you increase the equity, that's where the wealth in real estate comes from. Everybody talks about real estate being something that helps you build wealth. The reason why is it all comes down to how much equity do you have in that home? That's where that main wealth asset portion is in real estate.
Sometimes real estate can have a cash flow, meaning money comes in monthly, but if it's your primary residence, then you're mainly looking at that equity.
Let's first talk about how do we figure out what equity is. Equity is the value of the home minus the debt for your home. So the value of your home minus your mortgage, maybe you have a second mortgage. Maybe you have a home equity line of credit. You're going to take that, subtract those. And that's going to give you your equity. And the reason why equity is important is it's all about net worth equity is the net worth that you have in that piece of property.
So for instance, if your home is worth $200,000. That means you listed it for sale. You could list it for $200,000, but you currently have, let's say $150,000 mortgage on it. Your equity is $50,000, right? You don't have a $200,000 net worth because you have a $2,000 property. You have a $50,000 net worth in that property because you have 150,000 in debt.
So take the value minus debt, and that gives you your equity. So to increase the equity, what we need to do is either need to increase the value of your home, or we need to decrease the debt that you have in your home. So let's talk about two ways that you can do.
First, let's talk about increasing the value. One is market appreciation and market appreciation is simply where we are waiting for the market to trend upwards. So the value of our home goes up. For instance, maybe you bought your house for 200,000 now, but in five years you might be able to sell your house for 250,000. So real estate tends to appreciate over time.
Meaning each year real estate values tend to go up and obviously they fluctuate. But the same thing where the stock market over the last, let's say 50 years has had a trend of averaging about 10% growth. Real estate does the same thing in different areas. It appreciates differently in some areas, it might be 3%, some areas it might be 9% or 12%. It really just depends on that area, but real estate is going to appreciate, and that value is going to continue to go up.
Something else you can do to increase the value is inside renovations. So inside renovations would be things that you're fixing with maybe structural additions to the inside of your home. Maybe you're updating the kitchen or you are updating fixtures or the bathroom, or you're doing things inside the home that increase the value.
Now somebody has to be careful with these renovations is you don't want to go put a granite countertop and an $80,000 house, because what you need is you need comparable sales to support the value of the property, right?
So if your home right now is worth 80,000 and all the other homes in the area are worth around 80,000, you don't want to go put a ton of additions into the kitchen because when that home gets appraised, the appraiser's going to look at all of the comparable sales around the area, and it can actually degrade the value of the improvements.
So something to be cautious of when you are doing these improvements, you might want to talk with a realtor and an appraiser. This is to just give you an idea of what improvements can increase the value of your property.
So you can do inside renovations, you could also increase the curb appeal of your home. So making the outside more attractive as well. That's going to increase the perceived value of the home and how much you can sell it in the future.
So obviously, you can increase the value but you can also decrease your debt so you have more equity.
So as far as reducing debt, here are some strategies you can use. As far as reducing debt, here are some strategies you can use. As far as reducing debt, you can have different strategies depending on what you want to do with that debt.
First starting off, you can have a bigger down payment. The more money you put down, the more equity you have in the property, right? If you put 20% down, you immediately have 20% equity in that home.
Either you're putting a large down payment down, or maybe you're putting something smaller. If you're putting a smaller down payment, you might need to be a little bit more aggressive with your debt payoff. And if you're, if you put a larger down payment, you might be able to get away with more of a moderate paydown strategy.
You could also do biweekly payments. So every two weeks you're going to be making that mortgage payment instead of once per month, you're going to pay it every two weeks. Whether that's going to help you do is cut off some interest on that loan. So you can save a little bit more money. So some of that money is going to go to the principal and pay that down a little bit quicker.
That's not a super intense growth strategy, but it's one that could help. It's one that's easy to do without changing your budget dress.
Another strategy is doing something like $5 a day. People like to make the analogy of if you spend $5 a day on coffee what if you took $5 a day and put that into your mortgage? So you could put all of that money onto the principal of your loan. So $5 a day over a month would turn into $150 extra every month.
Put on the principal of your loan, meaning that debt gets paid down by an additional $150 every month. It doesn't seem like a lot, but it really does add up over time because keep in mind the payments that you make are always based on your current outstanding loan. So the quicker that the loan goes down, the less interest that you pay.
Something else you could do is take your tax return or any bonuses and put that into your mortgage principal. So instead of taking tax returns and going and spending it on whatever else, you could use it as an investment in your property.
So with all of these debt reduction ideas, you really want to make sure that you're putting money on the principal of the mortgage and not the interest. Because we're wanting to pay down the debt only, not the interest on the debt. But taking, those bigger bonuses that you get or a tax return is really going to help you pay down that debt pretty quickly.
And that was money that maybe you weren't expecting to begin with. So hopefully you're taking that money and putting it into something like a good investment instead of a vacation or just, free cash to spend on whatever else.
Another thing that you can do is what's called a recast. A recast is where you would put a lump sum of money on the principal of your mortgage. This is one of the quickest ways to pay down your debt. So basically with a recast, you might say, Hey, I have an additional 5,000. I'm going to go put that on the principal and my mortgage. And then what, what can happen is your mortgage lender can actually decrease your monthly payment because of that.
So if you paid, let's say an extra 10 grand on your principal balance, then they can recast it so that your payments drop down even more. So what I would do is if I put 10 grand on the loan balance, and let's say my payments dropped by an additional, a hundred dollars a month or $5,000 a month, I would take that extra money and continue to put it on the principal every month. So you compound those efforts there.
Something else you could do is a rate and term refinance. Refinancing is a fantastic way to reduce debt. One of the best ways to do it with a refi is to shorten the term of your loan. So if you were on a 30-year loan, shorten that down to 20 years or 15 years, you're going to save so much money.
Also, when you're saving money on interest, that means your money gets used more to pay down the debt quicker. The more interest that you pay in a longer-term or a higher rate means that the less the principal balance gets paid down, meaning it's going to take a lot longer for your debt to come down on that mortgage.
Something you want to be careful of is not to do a cash-out refinance. There's a rate and term refinance and there's a cash-out refinance.
A rate and term mean all you're changing is the rate of the loan or the term of the loan, meaning how long the loan is a cash-out refinance. It means you're actually increasing your loan balance to pull out cash. And we don't want to do that because that increases the loan or rate and term refinance normally is not going to increase your loan.
A final strategy that might not be applicable for everybody is considering renting or doing Airbnb. So if you have an extra room or an extra unit, maybe you could do something like Airbnb or leasing that out and taking that extra money and putting it on the principal every month, or you might move out of the property and just choose to rent it solely, take that rent money and put it onto the principal. That way someone else is paying the equity for you. So these should give you a really solid idea of how you're going to increase your home's equity. It's not going to magically change.
You're going to have to figure out how to both increase the value and pay down debt at the same time. And if you're doing both of these pretty aggressively, you're going to have really nice equity that grows as you increase the value and pay down debt.
You now have all of this equity. This can then be taken out to put in an investment property to use towards another type of investment to sell the property and get cash. There are so many things you can do with home equity.