6 Smart Ways to Build Your Home Equity
Create wealth through homeownership-build equity.
While, your home is one of your biggest investments and it brings together so many things under the same roof: dreams, status, shelter and maybe a gateway to better schools and neighborhood, your home equity is your financial stake in your house and is considered as an asset.
Home equity is the difference between your home’s value and your current mortgage balance. It increases with each house payment you make and is the key to building wealth as a homeowner. You can use your home equity to finance your kid’s college education, remodel your current home or purchase another home and can also provide a cushy nest egg for the future. It gives you a forced savings account too.
You can build equity by decreasing your mortgage amount and/or increasing the value of your property, which is not always in your control.
Here are six tips to help you build equity sooner rather than later without blowing your budget and how you can access it when you need it.
Let Your Home Appreciate
One method of building equity in your home without any effort on your part is rising home prices. When real estate values in your area climb higher you will gain equity simply because your property will be worth more. But this can take a little or more time depending on the market. Historically, appreciation has been a boon for many homeowners.
Make a Larger Down Payment
You can automatically get equity from the start and build it faster by making a larger down payment. This might look like putting money in an illiquid investment, but more equity means a lower loan-to-value ratio and can equate to no mortgage insurance, lower interest rate and easier to obtain financing. Over time, the lower mortgage rate will mean that you have to pay less interest and acquire more equity. But you must assess all your financial goals before doing this.
Choose a 15-Year Mortgage Loan
When you are buying or refinancing a house you might
think that a 15-year mortgage is out of your budget and choose a 30-year mortgage. But, if you run the numbers and compare the costs with your mortgage lender you might discover that a 15-year mortgage term is within your reach.
If your mortgage amount is manageable you should consider a shorter-term as you will not only pay off your loan in half the time but will also enjoy the benefits of having access a great amount of home equity.
Improve the Property
Another way to boost home equity is by making some smart home improvements. They add more value to your property than you realize and you do not need to empty your bank account.
Chris Terrill, CEO of HomeAdvisor said that a minor kitchen remodel is one of the best investment a homeowner can make. Projects like updating the countertops, refinishing the cabinets and installing new appliances can provide a high return without you spending a lot of money.
The other home improvements that add meaningful value include an additional bathroom, installing new windows and doors, replacing garage doors, completing a bedroom addition and most important of all landscaping.
Pay More on Your Mortgage
A good option to increase your home equity is to make larger payments each month, with the extra portion going towards the principal and not interest. Here are a few ways that can help you pay more regularly:
- Add an extra amount to your monthly payment. You can pick an amount that is big enough to make a difference but not so big that it crimps your budget. For example, if your payment is $1,083 you can round it up to $1,200 and then increase the amount whenever possible.
- Another way of adding to your monthly payment is to boost the payment by an amount equal to a twelfth of a payment. So that by the end of the year you will have made an extra payment.
- You can switch to a bi-weekly mortgage payment plan, where you pay every two weeks instead of monthly. This will add one extra payment on your mortgage yearly.
- You can also schedule automatic extra payments from your bank to your mortgage account at regular intervals.
With your extra payments, you will shave down your mortgage term, save hundreds or even thousands of dollars in interest and build home equity faster.
Use Gifts, Bonuses, and Windfalls
If you do not want the commitment that comes with increasing the size of your payment or a 15-year mortgage, take advantage of holiday and gift cards, bonuses, overtime, and inheritance to pay down your mortgage. Your mortgage server can tell you how to add these drips and drabs or a big windfall to build your equity. But, you should make certain that the money goes towards your principal and not interest.
How to Use Your Equity
Your home equity is an asset and so a part of your total net worth. There are several ways by which you can put that asset to work. You can buy your next home or can borrow against your equity and use it just for anything like refinancing, selling your home or for any big life expenses. The three most well-known ways you can access your home equity is with a home equity loan or equity line of credit (HELCO), or cash-out finance. Rates are rising just now, so your borrowing options may cost more in the future. You must talk to your lender to determine the best approach for you.
Building up equity is often worthwhile, but the secret is moderation. You should remember to keep your financial life in balance by saving for retirement, being ready of emergencies and most important of all paying off debt.