Building equity in your home is important. Home equity can be used to finance your kid’s college education, remodel your home or buy another property. A smart homeowner can take advantage of both mortgage payments and their real estate investment to build financial muscle and eventually gain wealth.
What is Home Equity?
Home equity is the difference between what your house is worth and the balance of your mortgage. It’s the money you have leftover after accounting for your outstanding loans.
For example: If your home value is $350,000, and you owe $200,000 on your mortgage. The equity in your home will be $150,000 (Home value ($350,000) – Mortgage balance ($200,000))
How to Build Equity?
As a homeowner, there’s nothing more valuable than having home equity. This is financial ground that’s under your feet (pun intended) and should not be taken lightly.
Here are two basic ways to build equity in your home
- Increase the property value
- Decrease the amount of debt owed to the lender
Find out how can you increase your property value and decrease the amount of debt by following these 4 useful tips and ensure you’re building equity in your home faster and smarter.
Focus on Paying Off Your Mortgage
Your home equity is equal to your down payment and the amount of money you’ve put toward paying off your mortgage. This means you can build your home equity simply by making your monthly mortgage payments. Just think, every month that you make all of your principal and interest payments on time, you’re building equity in your home.
To have a successful home equity building plan, it’s important to understand what parts of the mortgage repayment play into equity building. Here are the two different ways you can build equity quickly:
Paying more: If you have a 30-year mortgage and make extra payments toward your mortgage, the value of your home will grow faster than the cumulative interest on your loan. In effect, any part of a payment made to the principal is an investment in the equity you will build.
Paying faster: Your home is your biggest investment. One of the best ways to build equity in a home is by accelerating mortgage payments. This approach is actually good for the lender too as it reduces the amount of interest they have to pay on their investment over time, for a total win-win that benefits both of you.
Make a big down payment
The down payment is the initial amount of cash you’ll typically need to put toward a home. While some lenders will allow for just 3% as a down payment, having a down payment that is equal to 20% or more of the final purchase price will enable you to avoid PMI and provide you with more equity instantaneously. This way, if your home’s value decreases during the time it takes you to pay off the mortgage, your equity will still cover part of its worth and you’ll be able to sell your home or refinance into an assumable loan.
Refinancing to a short-term loan
If you have a 15-year mortgage, you get a lower interest rate and a larger portion of your payments go towards principal rather than interest. This will increase the amount of home equity you build every month compared to a 30-year mortgage. It’s important to note that payments are higher with a shorter-term loan. Still unsure of which loan is best for you? Schedule a free consultation with one of our mortgage experts today!
Increase the property value
Homeowners who are looking to improve their equity or pay off their mortgage faster, invest in home improvement projects that increase the value of their home. The key to finding what upgrades will give you the most return on your investment is understanding the benefits and the costs of each project.
It’s no secret that with each passing year, home prices continue to rise across the country. However, investing in home remodeling projects is also a great way to boost your equity and increase the value of your home.
Before making investment decisions, you should always do your research. There are various ways to increase home value, and every project will have you looking at comparable market data to see what homes have sold for in the surrounding area.
Contact us at (605) 718-9820 or schedule a call and let our mortgage experts help you with your home loan.