How to Turn Debt into Equity
The most common forms of debt are home mortgages, auto loans, education loans and credit card debt. Equity is the monetary value of your asset, minus what you owe on it. It is the opposite of debt. Turning debt into equity is similar to saving money. Instead of depositing your money into the bank, you make payments to lenders, which increases your equity and decreases your debt. As your equity increases, your ownership of the asset increases. Any reduction you make in your debt will increase your equity in a particular asset.
- Difficulty:
- Moderately Easy
Instructions
Things You'll Need
- Mortgage payment stub
- Auto loan documents
- Education loan statements
- Credit card statements
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Turning the debt held against your home into equity is simple: Continue to pay the balance you owe on your mortgage. Unless you have an interest-only loan, each payment will be allocated to principal and interest by the lender. As you make payments, you reduce your debt and your equity increases. In the case of a home, the equity is also related to the real estate market. The amount of equity you have in your home is equal to the current market value of the home less the amount of debt you owe on the home. Review your current mortgage payment stub or statement to find out the principal you owe.
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Arrange with your bank to make biweekly mortgage payments. Biweekly mortgage payments involve paying one half of your monthly payment every two weeks. In doing this, you reduce the amount of interest you pay on your mortgage; your last two payments of the year go directly to principal, increasing your equity. Use the biweekly mortgage calculator to find out how much interest you can save (see Resources).
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Pay more on the balance you owe on your vehicle. This will increase the equity on your car, van, or truck. The blue book, or resale value, of the vehicle, less the debt you owe, represents the equity you have in your vehicle. In the case of a leased vehicle, there is no equity since you do not have ownership of it.
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Pay down the debt you owe on education loans as quickly as possible. Paying off your student loans will enable you to pay down other debt, such as your home mortgage. Interest rates and repayment terms on education loans are designed with the student in mind. Take advantage of the low interest rates and long payoff periods and make payments slightly larger than what is required. This will enable you to pay off your loans more quickly and a reduce the interest you pay. Gather the documents relating to your education loans and use the student loan calculator (see Resources) to determine the savings available to you if you make slight modifications in your monthly payment amounts.
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Increase payments on your credit cards. Making the minimum payment each month will not result in a payoff any time soon. If your credit card debt increases by a large amount in a short period of time, it will not be easy for you to find financing for a home or auto. That is why any reduction in credit card debt is an increase in your equity, even though there is no asset directly linked to credit card debt.
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Tips & Warnings
Consider using a tax refund to pay off a debt. Think of it as investing in your financial health. Paying off debt will yield better financial returns than going on a shopping spree.
There is a fundamental difference between building equity in a home versus building equity in a vehicle. The market value of a home generally increases over time in response to the real estate market. As the market value of the home increases and the amount of debt owed on the home decreases, your equity in your home increases. However, vehicles depreciate over time and do not retain value. It is still useful to payoff debt on vehicles, but the rate at which you build equity will be greater for your home.
