Equity is one of those words that can be confusing and maybe even a little intimidating for many people. Isn’t equity something big hedge funds have? Do I need some sort of license in order to buy equity? The fact of the matter is, if you have anything of value that you could sell for more than what you owe on it, then congratulations — you’ve got equity! Most people think of equity in terms of the value of their home, but you can also have equity in a car, a boat or RV, computer equipment, artwork or a business. How much equity you have in an asset relative to any debts against it is commonly referred to as your equity position.
Equity is important because it’s a mechanism by which you can convert assets into cash should the need arise. Additionally, you can often borrow against the equity in your assets such as the case with a home equity loan or a home equity line of credit (HELOC). And while equity isn’t money in the bank, it might be the next best thing. So if it’s that good, then how can you get more of it? There are basically two ways…
Strategy #1 For Building Equity: Increase the Value of Your Assets
First, you can increase the value of the assets you own. How can you do this? That depends on the asset, but making home improvements is an example of one way that people attempt to increase equity in their home. In this particular case, an added benefit is that you get to enjoy that improvement while you (hopefully) gain equity. However, it’s important to remember that not all home renovation expenditures increase equity. You may make a change or addition that future buyers don’t like, and therefore does not increase the home’s value. Or you could add an improvement that people like but are not willing to pay for. This can occur if a home is over-renovated relative to real estate values in a particular neighborhood.
Similarly, growing a business you own can increase your equity it in. By gaining customers or increasing the capacity to sell more products or services, for example, the business can become more valuable and the owner’s equity position can increase accordingly.
Strategy #2 For Building Equity: Decrease Debt
The other way to increase equity is by decreasing any debt obligations on your assets. There is a strategy you can use to pay down your debt and grow equity faster and potentially lower the amount of interest you end up paying over the life of the loan. Biweekly payments are a simple and straightforward way to reduce many types of debt and improve your equity position. Here’s how it works using a mortgage, for example. Suppose you have a $300,000, 30-year loan at 4% interest and your regular monthly mortgage payment is $1,432.25. If instead, you simply paid $716.13 every two weeks, you’d make 26 half-payments annually — or the equivalent of one extra payment per year. As a result, you’ll pay off that 30-year mortgage in 25 years, 11 months and save more than $33,647.94 in interest with AutoPayPlus.
With biweekly payments, you can get out of debt sooner and pay less total interest over time. But you can also build equity faster. How many people do you know that stay in their home long enough to pay off a 30-year mortgage? Not many, probably. So what happens when you sell your home just a few years into your mortgage? Usually because of the way mortgages are amortized, with the bulk of the interest being paid up front, you’re not in a very strong equity position because you haven’t paid down a significant amount of principal during those first few years. So you can pay your mortgage for years, pay taxes and pay to maintain your home, but the only one with something to really show for it when you sell early is your lender.
Making biweekly payments on your mortgage can help stack the deck in your favor, should you sell early in your loan term, by helping you build valuable equity faster. Biweekly payments are particularly beneficial with loans whose terms are longer and with loans that carry higher interest rates.
An Equity Building Strategy
Make a list of all of your current assets and how much equity you have in each of them. Then consider ways that you can build equity by increasing the value of those assets or by decreasing any debt obligations you have against them. For many Americans, equity — even more so than cash in the bank — is the path to financial security. Don’t ignore this important facet of your financial life.
If you want to learn how biweekly payments can help you get out of debt sooner, save on interest and build equity faster, call one of our professional loan consultants today. We’ll do the math and the legwork for you. With APP, you can sign up an unlimited number of loans during your 6-month open enrollment period. That means you can start saving on a mortgage, car loan, student loan, credit cards and even business loans — with no additional upfront costs.
There’s a saying that time is money. That’s certainly true when it comes to paying down your debt. The sooner you start, the more you can save. Call us today.