Have you heard the term “sweat equity” and wondering what it means?
While sweat equity can involve sweating, the term is generally used to describe improvements that you can make to your home.
What is sweat equity?
Sweat equity consists of improvement projects you can do to your home that don’t cost a lot, but do increase its value; such as painting the kitchen cabinets or putting inexpensive tile in the entryway.
If you’re on a budget, make sure you avoid making improvements that might immediately lose value, such as adding expensive entry doors, designer fixtures or anything that over-improves the property.
How can I gain equity in my home?
Your home’s equity is the value of the unencumbered interest you have in your property. In other words, the portion of your property that you truly “own.”
You might own your home, but if you borrowed money to pay for it, your lender also has an interest in it until your mortgage is paid.
The following items will add equity in your home:
• Your down payment.
• Payments on your principal balance.
• Improvements that increase the value of your home.
If you’re a homeowner, then the first two items already are being taken care of (as long as you are making your mortgage payments on time.) Let’s assume you purchased a home for $200,000, with a 20% down-payment ($40,000). In this example, your home equity interest is 20% of the property value, or $40,000. If you’re looking to gain further equity, “put some sweat into it” and work to increase your home’s value.
Start on projects to improve your home, whether that be aesthetically or in functionality. Here are some relatively simple weekend projects you can complete inside your home.
• Upgrade your doors, light fixtures or hardware. Even adding new knobs to your kitchen or bathroom cabinets can help with aesthetic appeal. You can look at adding a backsplash to your kitchen or refacing your fireplace. Another relatively simple home update is painting the walls or refinishing your floors.
• As far as functionality, consider adding a closet, remodeling a bathroom or transforming your home into a smart home.
Some of these updates are self-projects you could do in a weekend, but for the more complex options, you’ll want to consider hiring a contractor. Many of us have seen TV shows that make improvements seem much easier and less expensive than they are. If in doubt, hire a professional!
How does sweat equity help?
As you put sweat equity into your home, your home’s value generally increases. This could be beneficial when you consider a cash-out refinance to tap into gained equity for cash in your pocket, to pay down debt or for when you sell your home. Either way, you’ll end up with cash when you need it.
What do I do now?
Start planning easy projects to ease yourself into a sweat equity gain. If you need assistance in projects, scout out good contractors. You might be able to ask your friends, family, neighbors or a Realtor. Real estate appraisers can help determine whether a project can be profitable during resale.
If you’re planning a cash-out refinance, or a renovation refinance, to tap into gained equity, a conversation with a loan officer will be a great place to start. A renovation refinance will allow you to finance improvements right into your mortgage with one low rate. Renovation loans generally are available for conventional loans, VA and FHA loans, as well as for investment properties.
Keep in mind that your home’s equity can fluctuate with the market and housing supply and demand. Home equity technically isn’t a liquid asset so if you don’t have much to spare, be careful investing too much into your home.
Overall, investing in property and gaining further equity is something you’ll benefit from in the future. That’s the beauty of homeownership — so enjoy it.