A home is one of the best and biggest purchases you will ever make. And as you probably already know, one of the benefits of purchasing a home is that you get to build equity in it and maximize ownership in the property over time.
What is even more interesting is that you can use that equity to pay off your high-interest credit card debt, finance your child’s college education, pay for a major home remodel project, or even supplement your retirement income. But what exactly is home equity, how does it work, and how can you go about building it?
What is Home Equity?
Home equity refers to the portion of your home that you actually own. To determine your home equity, simply subtract your mortgage balance (what you owe on your home) from your home’s market value.
The fact that you took out a loan when buying the home means that, until you fully pay off the loan, your lender owns a portion of the property as well. Your equity on the property increases with each mortgage payment you make every month. So, if you buy a home with a 20 percent down payment, you already have a 20 percent financial stake in the property. And as you make monthly payments to reduce your loan balance on the home, you build more equity.
The more equity you have in your home, the more likely you are to be able to leverage your home as an asset in times of need. For example, later down the line, such as a home equity line of credit or a tax free release of your equity using a reverse mortgage loan (check out this reverse mortgage calculator by All Reverse Mortgage to get an idea of how much you may qualify for).
Generally, if you’re looking to sell your home, the more equity you have in the property, the more money you’re likely to get out of the sale. And if you’re looking for financing, the higher the home equity amount, the more money you can borrow.
How to Build Your Home Equity Faster
As mentioned, the more equity you have in a home, the better the offers you’re likely to get. You can build equity faster by either increasing the value of the property or decreasing the amount of debt. That said, here are five ways you can build your home equity:
Make a Larger Down Payment
One of the best ways to build equity in a home within a short period of time is to make a bigger down payment. The down payment you make when purchasing a home usually gives you instant equity before you can start building it over time. As such, the more amount you put down, the higher the equity amount you must start with. And if you’re able to pay a down payment of at least 20 percent on your mortgage loan, you won’t have to worry about paying pricey private mortgage insurance (PMI).
If you have the money and want to build equity in your home as quickly as possible, consider writing a bigger check upfront. This will help lower your monthly mortgage payments as well as your interest. Plus, you’ll be much closer to paying off your loan balance and owning a positive financial stake in the property.
Make More Mortgage Loan Payments
Your home equity at any given time equals the down payment you made plus the house payments you’ve made towards paying off the loan. A portion of your monthly mortgage payments goes towards your loan’s principal balance while the rest covers the interest and property taxes.
It’s important to note that, in the beginning, a larger amount of your monthly mortgage payment covers the interest, and over time, more is directed towards the principal. And since most mortgages in the market operate on an amortization schedule—where the borrower makes monthly payments in equal installments over an agreed period of time until when the loan is paid off — you can build equity faster by making extra monthly payments towards the principal. Here are two ways you can pay more regularly.
- Consider adding an extra amount to your monthly mortgage payments. Why not put an extra $50, $100, or $200 towards your mortgage every month? For example, if your monthly payment is $892, consider rounding it up to $1,000 so you can pay more each month.
- Use bonus money and gift bfunds whenever you can. Anytime you get a holiday bonus from your employer, tax returns, or even some overtime payment, use it to make your mortgage loan payments so you can stay ahead of schedule.
Increase the Value of Your Property
As a homeowner, you already know that you can increase your home’s value with remodeling projects such as updating the kitchen, renovating the bathrooms, making energy-efficient upgrades, and improving the landscaping. By boosting your home’s value, you’ll be increasing your equity as well.
Focus on home improvement projects that offer the highest return on investment. You don’t want to waste your time and money on projects that won’t add any value to your home. It’s also important that you maintain your property and keep it in the best shape possible.
Consider Refinancing and Shortening Your Loan Term
A shorter mortgage loan term makes it possible for you to pay down your mortgage loan and build up equity on a home more quickly than a long-term loan. This is because the lender gives you a lower interest rate and allows you to make more payments towards the principal every month. So, if you’re looking to build equity, then refinancing your property and choosing a shorter mortgage loan term might be a good idea.
You can build more equity each month with a 15-year loan term option than you would with a 30-year mortgage loan. But that will also mean paying more every month. Check your budget to make sure you can afford the higher monthly payments before choosing to take out a 15-year mortgage.
Wait for Your Property’s Value to Rise
Patience pays, right? Yes, you can simply sit back and patiently wait for the value of your home to rise. Keep in mind that the housing market across the country fluctuates and, when home prices in your city or neighborhood increase and the demand go up, your home’s value naturally rises. And as a result, your home equity will rise as well. Conversely, a drop in home prices will result in a loss of some property value and equity. Thanks to reverse.mortgage for consulting.
