How Does Home Equity Increase Net Worth?

Calculating Your Home Equity

In order to calculate your home equity, you first need to know how much you owe on your home, and how much your home is worth. Your mortgage is considered a liability, or a debt, that detracts from your net worth. Let’s take a very simple example: you have just bought a $500,000 home, and you made a $100,000 down payment. You now owe $400,000 in mortgage payments over 30 years. This effectively adds $100,000 to your home equity and will increase net worth by $100,000. As you continue to make mortgage payments, your liabilities will decrease, and property equity and net worth will increase. In real-life, you must also take into consideration the real estate market, inflation, and other external factors.

How To Increase Net Worth and Home Equity

There are a few different ways that you can approach increasing your home equity and, therefore, your net worth. First, you can consistently pay more than your mortgage. While an extra $100 per month may not feel like it is increasing your equity, it adds up over time! In five years, simply paying $100 more than your base payment every month can lead to an increase in $6000 worth of equity. Additionally, you can invest in remodeling projects or home improvements to increase your home equity. If you add an extra bedroom or bathroom to your home and get it appraised, this can instantly add to your home equity. Finally, you can refinance your home mortgage for a shorter term. If you refinance your home from a thirty-year mortgage to a fifteen-year mortgage, you will be paying more toward your mortgage every month, therefore reducing your principal and increasing your property equity so you can increase net worth.

Investment Property Equity and Net Worth

If you have an investment property that you paid for in cash, this instantly increases your net worth and home equity by the value of the home itself. If you rent the property out, even better! If you finance your vacation property with a mortgage, the rental payments can assist in paying off your principal loan faster and thereby increasing your home equity and net worth.

Conclusion

Overall, calculating your home equity and net worth is simple subtraction. However, this can be affected by the real estate market, renovations, and other external factors. Talk to an appraiser or real estate agent to learn more about your equity and net worth.