For many Americans, home equity is their biggest asset.
As noted by Zillow, the median home price in the United States is now $220,100 and according to The Lenders Network, the average down payment is just 6 percent. The result? Buyers are leveraging more than $206,000 to buy their homes.
As financial expert Michael Kitces points out, this is the reason 81 percent of Americans still believe that home ownership is the best long-term investment. Given the substantial amount of leverage involved, even moderate improvements to home equity can pay big dividends.
But what are best ways to build your home equity? What projects should you take on? What should you avoid? Are there other strategies to build long-term value? Here's what you need to know.
Five Top Home Improvements That Build Equity
One option to build equity is a home improvement project. But what's your best bet? Here, it's all about ROI — return on investment. This is calculated by comparing the money spent on a project to the potential value increase if you choose to sell your home. While almost any project adds value, it pays to be smart about what jobs you take on to minimize spending and boost total gains.
Looking for great ROI? Try one of these top home improvements to build equity:
- Garage Door Replacement - As noted by Realtor, replacing your garage door offers the biggest return on investment at 98.30 percent. In terms of actual spending, the average cost of a new garage door is $3,470, while the boost to equity is $3,411. Added bonus? With the right contractor, this job doesn't take long and can add significant curb appeal to your home.
- New Windows - Replacing windows can add light to a room and improve energy efficiency, in turn lowering utility bills. Installing new windows also offers a solid return: Swapping out wooden windows costs around $20,000 for a $13,500 return (around 70 percent), while vinyl windows run $16,000 on average for $12,000 in value (just under 75 percent).
- Roofing Replacement - Replacing your roof shingles is a necessary home improvement project that is typically necessary around the 15 to 20-year mark, but it can also offer solid ROI. Expect to pay around $20,000 for a complete roofing overhaul, which nets a 68 percent return or just over $14,000 in equity.
- Kitchen Remodel - Considering a bigger project? In some cases, it's worth the cost. According to U.S. News, a midline kitchen remodel that includes refinished cabinets and updated finishes can generate 80 percent ROI, while major overhauls yield 65 percent. In terms of cost, a minor project runs around $20,000 while bigger remodels can cost upwards of $60,000. If you're planning to stay in your home for the foreseeable future, choosing the kitchen also offers near-term benefits for ease-of-use and overall comfort.
- Backyard Patio - Outdoor investments can also pay off. If you're willing to put in the money — around $50,000 — for a full backyard patio remodel, you can recoup around 50 percent of your investment and generate additional ROI. The caveat? Make sure you choose your contractor wisely. Poor-quality landscaping and deck building just means bigger costs and more headaches down the line.
Pick Projects Carefully
There are some projects that simply aren't worth tackling. There's a general rule here: While extremely personal or unique projects may add value for your family, they don't have the same impact on potential buyers.
In practice, this means avoiding high-cost projects that come with large maintenance requirements, such as swimming pools or high-end landscaping. Also a miss? Built-in electronics such as movie theatre screens complete with seating and surround sound. Money Crashers puts it simply: "That floor-to-ceiling media center may be exciting to you, but to some prospective buyers it could represent a waste of valuable space and a drain on energy costs."
Highly personalized decor such as vibrant paint colors or wall-to-wall shag carpeting offer similarly poor ROI. Why? Because they galvanize strong reactions among prospective buyers. Worst case scenario? Receiving home buying offers that include stipulations to repaint walls or remove specific decor elements. In this situation, you're paying on both ends — first for installation and then for removal.
Two Other Ways to Build Your Home Equity
It's also possible to build equity without taking on home remodeling or design projects. As noted by the New York Times, one trend among homeowners is refinancing their mortgage from a 30-year term to a 15-year term. If you have the financial stability to make this work, it's a great option, since it significantly speeds up the process of paying down your mortgage, reduces total interest paid, and boosts your equity.
Meanwhile, keeping your home clutter-free and performing regular home maintenance can also improve total home equity. By regularly completing minor tasks such as replacing slow-filling toilet fill valves, cleaning out eavestroughs, and steam-cleaning carpets, you reduce the total amount of spending needed to prep your home for sale, in turn boosting your return.
All About ROI: Managing Your Biggest Investment
Your home is your biggest investment. It's also your biggest source of equity — and tackling the right home projects can help boost your total ROI. Opt for solid returns like new garage doors, windows, or minor kitchen remodels, but skip passion projects such as swimming pools or lime-green walls.
Also a good idea: Keep up on regular home maintenance and, if possible, consider refinancing your mortgage to shorten your term and generate equity. Need help finding a great rate and the right term for you? NB|AZ has you covered— come see what we can do for you.