Building home equity might seem foreign to a new homeowner, however, it’s pretty important, and it can be a tremendous financial asset in the near future. You can cash it in for home remodeling ventures. Then use it to help ease the burdens of college tuition, and much more. Firstly, let’s get some basic knowledge of managing home equity means and then layout how to build it.
What is Home Equity?
Simply put, home equity is the portion of your home that you own after your mortgage balance has been deducted. For instance, your home value is $350,000, and you put down a down payment of $50,000 on the mortgage. Your home equity would be $50,000.
Now, the value of your equity can either increase or decrease as one of the significant factors that determine it is the market value of your home. For example, if your home’s market value jumps from $350,000 to $400,000, your equity would be $100,000 after the mortgage balance has been deducted from the total sum.
However, if the market value of your home drops to $325,000, then your home equity would become $25,000 after the mortgage balance has been deducted from the total value. There are two ways to build equity: Reduce debt, and increase property value.
How to build home equity
- Choose a shorter loan term: With shorter loan terms, you can build home equity faster and pay down debt than with long-term loans. For example, a 12-year loan term would carry a lower interest rate than a 25-year loan term which means you can pay off the interest quicker. So you get to build equity faster.
- Making a sizeable down-payment: For starters, you can ensure to make a large downpayment on your mortgage as this becomes instant equity. For instance, if you decide to put down a 20% downpayment on your $350,000 home, you instantly accrue a $70,000 equity on your home. You also get the added advantage of avoiding paying private mortgage insurance when you pay a substantial amount of your loan as a downpayment.
However, you should also realistically consider your current financial situation to ascertain what percentage downpayment you can comfortably put down without getting stranded in case of emergencies.
- Pay off your mortgage: The more of your mortgage you pay off, the manage the home equity increases. You can say that you are essentially buying your home equity with every payment. At first, a higher percentage of your payments goes towards paying off the interest of the loan. Nevertheless, the more payments you make, and over time, the portion that goes towards paying off the principal increases. You can try splitting your mortgage payments into bi-weekly payments instead of monthly payments. This adds one extra payment to your mortgage each year, and this can ultimately lead to your loan term being shortened.
- Increase Property Value: The more your home is worth on the market, the higher your equity. You can increase your property’s value through constant maintenance and renovations. You can decide to add new features like a pool, jacuzzi, flower gardens, and an extra bedroom. These will make your home more attractive to buyers and increase its worth.
- Pay more: You can always add more money to your monthly payment and specifically request that it be added to your principal payment. If your monthly payment is $1200, you can decide to pay $1500 every month and request for the extra $300 to be added to your principal.
You can also take advantage of extra cash like tax refunds, gift cards, and spare cash after expenses and use them to add to your managed home equity.
- Sit Back and Relax: Home and property values naturally go up with time especially when the demand for housing far outweighs the current supply. As long as you keep your property attractive and habitable sooner or later, its value would go up and so does your equity.
Home equity can really come in handy in cases of emergency or when you’re building a business and you happen to need extra cash, you can also cash it in if you decide to sell the property after a while.