Investing in Your Home: More Than Just a Roof Over Your Head

For many, buying a home is the quintessential American Dream. But beyond the rewarding emotional value, your home can also be a significant financial asset. Understanding how your home can work for you financially is key to building long-term wealth. The value of this investment depends on the amount of equity you build, how well you maintain your home, and whether you improve its form and function. Let’s dig into the ways you can invest in your home.

What is home equity?

Home equity is the current market value of your home minus the amount you owe on the mortgage. It’s the portion of your home that you truly “own” outright. For example, if your home is currently worth $500,000 and you still owe $200,000 on your mortgage, your home equity is $300,000.

You gain home equity when your property’s value goes up. You also gain equity with each mortgage payment you make. This equity can be leveraged for various financial goals.

Building equity through payments

You will build equity in your home by making regular mortgage payments (unless you have an interest-only loan). While the initial payments often lean heavily toward interest, a portion always goes toward reducing the principal balance of your loan. As you consistently make payments, the principal balance shrinks and your ownership stake in the property increases.

There are ways you can pay the principal off more quickly:

• Make larger payments — if you can afford it, you can include an additional amount to be paid toward your principal. This can be done with each payment or whenever you choose to make a larger payment.
• Switch to bi-weekly payments — a bi-weekly payment plan lets you pay half of your mortgage payment every other week instead of paying the full amount once a month. Over the course of the loan, you end up making more frequent payments and paying off the loan more quickly.

Refinancing for better terms

At some point in the life of your loan, you may want to refinance for better terms. Refinancing involves taking out a new loan to pay off your existing loan. You don’t want to do it too often, as you incur closing costs each time, but there are situations where refinancing can help you build equity more quickly.

• Lower your interest rate — if the market changes or your credit score improves, you may be able to secure a lower interest rate. This means lower monthly payments and less interest paid over the life of the loan. It can also free up cash to put toward paying off the principal more quickly.
• Shorten your mortgage — a shorter-term mortgage (e.g., 15-year versus 30-year) with a lower interest rate lets you build equity more quickly as a larger portion of the payments goes toward the principal.
• Change an adjustable-rate mortgage (ARM) — if you have an adjustable rate, the interest can change over time. Refinancing may let you get a new rate ARM with a better initial rate.

How improvements can bring big returns

Investing in strategic home improvements can significantly boost your property’s market value and, consequently, your home equity. While cosmetic upgrades can make your home more appealing, focusing on improvements that address functionality, energy efficiency, and usable space often yield the highest return on investment. 

While there are no guarantees, some types of upgrades are frequently recommended. Kitchens and bathrooms are some of the most frequently used rooms in the house and upgrades can add significant value. Increasing the size of your home with interior and exterior additions can also have big returns. Thorough research and planning are essential to ensure your improvements align with market trends and add tangible value to your home.

Tapping into your home equity

As your home equity grows, it can become a valuable financial resource — giving you more options when you’re in need of cash. You may want to tap into your home’s equity to help pay for your children’s college education or do some home improvements. Or some people do it to consolidate debt or fund another investment. 

There are options when it comes to accessing your home’s equity:

• Home equity line of credit (HELOC) — a HELOC is a line of credit that uses your home as collateral. You’ll be approved for a certain amount of credit depending on your home equity. The HELOC will have to be paid off when you sell your home.
• Cash-out refinancing — refinancing for an amount that is more than what you owe on your home lets you receive a cash payment for the difference. Doing this will lower the amount of equity you have in your home.

Your home is a significant asset with the potential for growth and financial leverage. Whether you’re looking for ways to build more equity in your home or tap into the equity to receive cash, the experts at Embrace Home Loans can help you find the right option to meet your needs.