Is your home one of your biggest assets? For many Americans, the answer is yes. If you’re like them, you are probably concerned with how to protect your home’s equity and grow its value as part of your overall financial plan.
As of late, a strong economy and robust housing market have led to steadily increasing home equity levels. At the end of 2018, more than 14.5 million U.S. properties were “equity-rich,” meaning their home’s market value is double the mortgage on the home, according to a report from ATTOM data solutions.
But a positive home equity environment shouldn’t lead to complacency. “Equity reduction can come when you least expect it,” says Rob Cook, Head of Marketing and Customer Experience for Discover Home Equity Loans. “Even slight economic or real estate fluctuations could reduce home prices, and you want to be in a good equity position if that happens.”
These guidelines show you how to build home equity, despite market dips, and get it in a good position for market peaks:
Look to reduce your principal. One of the easiest ways to not lose home equity is to simply stay in your home and make regular payments on your mortgage—and make additional ones if possible. The goal is to reduce the principal you owe on your loan. Over time, as you pay down your mortgage and your home’s value increases, your equity will rise.1 While your home’s value will fluctuate over time (and could even go down certain years), the money that you pay toward your mortgage will allow your equity to continue growing.
Perform regular upkeep.
When you make changes to repair, maintain or improve your home, think about whether they’ll add value for a future buyer, even if you’re not planning on selling any time soon. While it’s rare for home renovations to generate an immediate dollar-for-dollar return on investment,2 they can help improve the value of your home over time and make it easier to sell or refinance. To get the best return, aim to keep your projects in line with other homes in your neighborhood.
Leverage your home equity to pay for projects that will increase income.
A home equity loan can serve as a powerful financial tool. Using home equity to improve the value of your home, start a business, invest in education or consolidate debt to a lower rate, all can represent smart, long-term financial moves.3 Some lenders, like Discover Home Equity Loans, can even help you save money when you finance by offering zero origination fees and zero cash due at closing. But it’s important to make sure that you understand the terms of the loan and have a clear plan for how you’re going to pay it back so you don’t lose equity.
Consider a fixed-rate strategy:
One factor to consider: Rate fluctuations. After several rate decreases in 2019,4 it’s unclear whether the Federal Reserve will continue to cut rates. If you’re worried that rates could go up in the future, locking in a fixed-rate home equity installment loan while rates are low means that rising rates in the months or years ahead would have no impact on your payment.