Home equity is the percentage of your property’s value that you own. It is the key to gaining wealth through owning a home. Read more below about how to build home equity without blowing your budget. You will also learn how to access it when you need it.
How much equity do you currently have?
Equity is simple to calculate when you first buy a house because it’s basically your down payment. For instance, if you put down $11,000 on a home that’s $225,000, your down payment is about 5% and so is your equity.
Over the last two years, many first time home buyers in the United States started with about 7% equity, according to Inside Mortgage Finance. This is encouraging because it shows that you don’t have to spend years saving for a 20% down payment or more before you buy a home.
Here are six ways your property can create wealth for you. Some of these tips require money, time or both. Our lenders can help you decide what works best for you.
1) Letting your home go up in value
Building equity through appreciation can take some time. This depends on the market of course. With home prices increasing like they have been in recent years, price increase has been a plus for many homeowners.
2) Making a large down payment
This is possible to do, but waiting to save extra cash can go against your broader financial interests if you lose the chance to build equity through home appreciation. For this reason, you need to strike a balance among your monthly budget, down payment and savings for other priorities. A good lender can provide a mortgage rate and market insight to help you do this.
3) Using financial windfalls
Take advantage of your bonuses at work, gifts from the family and inheritances to pay down your mortgage. If you do pay it down in lump sums, ask your lender to recalculate your payment based on the now lower balance.
4) Making payments every two weeks
Make mortgage payments every two weeks instead of only once a month. Over the course of a full year, this will add up to thirteen monthly payments instead of twelve. You will build equity faster and take off five to six years off a thirty-year mortgage.
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5) Cutting your loan term in half
Take out a fifteen-year mortgage instead of a thirty-year mortgage, and you will build equity twice as fast. There are two things here; you will have a significantly higher monthly payment and you might have a tougher time qualifying because of that.
6) Making home improvements
New appliances or cosmetic features such as paint are not likely to increase the value of your home. Only big improvements such as an upgraded kitchen or additional bathrooms or rooms will add significant value. You should make sure the cost of such improvements will create the added value you are looking for.
How you can use your equity
You need to borrow or sell your home to use your equity. The three most common way to get to your equity is through borrowing a home equity line of credit (otherwise known as HELOC). The other two ways are a home equity loan or a cash-out refinance.
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