How to Maximize the Equity in a Home

Many families turn to "sweat equity" to raise home values.

Many families turn to "sweat equity" to raise home values.

Equity is the part of your home's value that belongs to you, and not to your creditors. It is roughly equal to the total value of your home with the amount you owe to the mortgage lender subtracted. Outside the general increase in home values in your area, there are two ways to increase equity: pay down the principal on your mortgage or raise the value of your home.

Apply a lump-sum payment against your loan principal. Apply that big tax refund from your mortgage deductions or that bequest from Aunt Tilly, directly against your principal balance. This will change the amortization of your mortgage so that more of your future payments go against the principal. Even a one-time payment as low as $2,000, early in the life of the loan, can dramatically change the way your monthly payments are credited and can shave months, or even years, off the life of the loan.

Accelerate your loan to pay it off sooner and build equity faster. Determine how soon you want to pay off your loan and use one of dozens of online mortgage calculators to figure out how much you would add to each month's payment to reach that goal. For instance, say you want change your 30-year loan of $350,000 at 4 percent to, for instance, a 25-year loan. The calculator says you should add $175 a month to your payment to go directly against principal. Every bit of that becomes equity as soon as you pay it. As an added bonus, you will "cheat" the lender out of $100,000 in interest. (Ref 2 and 4)

Improve your home. Upgrade your home with better siding, a new deck, solar panels or other substantial changes that make it bigger, more attractive or more economical to operate. If you do the work yourself, you will gain "sweat equity," and even if you hire someone to do the work, you will likely gain value. The exception to this rule is upgrades that don't match the neighborhood and upgrades, like swimming pools, that increase maintenance and insurance costs.

Improve your neighborhood. Home prices strongly reflect the quality of the neighborhoods where they are situated. Neighborhood amenities such as trails, parks and recreation centers, the appearance -- or decrepitude -- of nearby homes, the amount and speed of auto traffic and quality of local schools all make a difference in the value of neighborhood homes. You can join (or start) a neighborhood improvement association to lobby for a local park or better schools. According to a 1997 National Park Service study of trails and parks near residential neighborhoods, property values near those amenities were improved by anywhere from a few thousand dollars to an annual gain of 22 percent. You can also join a local "good guys" club to help lower-income or aged residents keep their homes in good repair. Anything that makes the neighborhood more desirable will support and improve local home values. Cities and counties will often be cooperative in helping to site and fund neighborhood amenities because increased property values translate into increased tax revenues.

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About the Author

Billie Jo Jannen is a politics and lifestyle columnist in rural San Diego County and a senior copy editor for Demand Media. Her writing and editing career spans 23 years, and she specializes in border and environmental affairs. Jannen's eclectic education includes engineering and horticulture, and she represents the Rural Economic Action League in regional economic development planning.

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