Building Up Home Equity

You can also help your home build equity by making improvements to it that will drive up the value, although the value of renovations may be limited to the overall condition of houses in the neighborhood.

Note that if you want to refinance, mortgage programs often require as much as 10% equity in your home. Paying down the principal on your original mortgage is the best way to build up equity. But to some extent, your home’s equity is variable and beyond your control. If the property values in your area increase, so too will your equity, even if you do not make improvements. This can also work against you, however. If the economy takes a turn for the worse and property values depreciate, you lose equity. If this happens, you’re better off paying on the principal of your mortgage, rather than just the interest, so that you don’t end up with what is known as negative equity. Negative equity results when the amount of the mortgage exceeds the value of the home. Negative equity could be detrimental if, down the road, you decide to refinance. Mortgage refinance rates change all the time. You may want to secure a new loan to lower your monthly payments on your home mortgage. Besides being less likely to be approved for refinancing, home mortgage holders with negative equity may face challenges when they go to apply for a second mortgage.