Housing...Inside and Out

October 6, 2000
Increasing The Equity In One's Home

The equity in your house will reflect any growth in the value of your home. The down payment you make may provide you with some initial equity, but the cost of closing the deal does not. When managing the financial aspects of housing, you can influence the growth of equity in your home, but you cannot control all the changes in equity.

Equity can increase in several ways. First, the value of a house may increase due to home improvements. Also, inflation and local supply and demand for homes may increase value. During times of inflation, the largest portion of the country's net worth is in home equity. Third, as you steadily repay your mortgage, you are building equity.

When looking at improvements as a means to increase the value of the house, consider carefully what you choose to do. Improvements rarely increase the value of the house dollar for dollar. For example, don't expect a $10,000 improvement to a $60,000 house to make the house worth $70,000. Improvements are most likely to increase a house's appraised value if neighboring houses are larger or in better condition. Conversely, if surrounding homes are smaller or have not been kept up, the cost of improvements to your home is less likely to increase its value. It is important that you monitor the condition of the houses in your neighborhood.

You will often hear the term appreciation. Your house is said to "appreciate" when its value increases without any improvements being made. Factors that affect the rate of appreciation include interest rates, inflation rates, house prices, and the state of the local economy.

You can also increase equity through principal repayment. Part of your monthly mortgage payment will repay the borrowed money (the principal). During the early years of a loan, most of your monthly payment will be for interest on the loan. Slowly, over time, a higher percentage of each payment will go toward principal. Many loans have an option that allows you to make extra payments toward the principal in addition to the basic payment. Ask your mortgage company about its policy.


Written by Dr. Francis Graham (Retired)

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