Building home equity is where the primary financial benefit of homeownership lies. As you buy your dream home, you’re not only buying a perfect property to house your family. You’re also ending up with a significant asset, an asset that you can use in the right situations.
When home prices rise, your home’s value increases along with your equity. The more equity you have, the better. While building home equity two things happen:
- Your property value increases.
- The debt amount decreases.
- As an active agent in Phoenix, I've seen people approach the purchase in one of two different ways.
They opt for a shorter term loan so that they can build that equity faster.
They take a longer-term loan so that they can have a smaller payment and/or buy a bigger home.
I've seen both approaches expand a buyers equity position. The longer-term loan may allow the borrower to control a more expensive property. That means the asset is bigger to begin with and the growth/equity comes as a result of a bigger base investment growing. The shorter-term loan allows the property to be paid off faster. The principle is paid down faster and the loan balance shrinks towards payoff more rapidly.
Maximize this asset by following these 6 easy-to-follow ways to build home equity in 2019
First, What is Home Equity?
Equity is the value that you have in your property that is not owed to a lender. How to calculate home equity percentage? Take your home’s market value and subtract it with your home loan balance.
Example: Your home value is at $750,000 You owe $600,000 on your mortgage. $750,000 - $600,000 = $150,000.
$150,000 is the equity in your home. Note that if you get a negative result, it means that your home is worth less than you owe on it?.
How does home equity work? What can you do with your equity?
Equity is a strong asset that lets you:
Receive cash after you sell your home
Have a home equity line of credit (HELOC)
Use a home equity loan to buy another house
Use home equity to pay off debt
6 tips to help you in building home equity in 2019:
1. Make big down payment
A larger down payment means having big instant equity. Prepare 20% of the property’s value. In this way, you can also avoid expensive private mortgage insurance.
2. Get a 15-year mortgage
When you take out a 15-year mortgage or refinance into one from a 30-year loan, you pile on the home equity a lot faster. This happens in part due to the lower interest rate attached to the shorter term loan. You’ll also save big time by cutting the number of years for the loan in half.
Before you say yes to this term, make sure you can cover the higher monthly interest payments with the 15-year loan. As a homeowner, it’s your choice to concentrate on reducing your mortgage to gain equity faster.
3. Improve the property
Do home improvements increase equity? Yes, but not all do.
Some remodeling and improvement projects can help in boosting a home’s equity.
According to Remodelling magazine’s research, the average payback on common upgrades is at 64 cents for every dollar spent.
According to the same report, the projects where value exceeded cost include the following:
- Front door replacement
- Garage door replacements
- A new roof
- Fresh exterior (stucco, siding, paint).
- Attic insulation
You can get the best out of these home improvements especially if you pay with cash instead of paying with a loan.
4. Pay more on your mortgage
When you decide to pay more, make sure that the extra money goes to your mortgage principal. Better call your mortgage servicer about this matter. You can find their phone number on your monthly mortgage statement.
Ask how to pay more, and watch your monthly statements. Make sure the money is credited properly. A few ways to pay more include:
- Add extra bucks to your monthly payment. Be sure to pick an amount big enough to make a difference, but doesn’t cripple your budget.
Example: Your payment is at $883, round up to $1,000. When you’re able, pay this amount.
Boost your monthly payment by an amount that equals to a twelfth of a payment. When the year ends, you’ve made an extra payment.
Have biweekly mortgage payments. When you pay every two weeks instead of every month, you can add one extra monthly payment to your mortgage annually.
- See if your current income can let you switch your payment modes. You can use mortgage equity calculator which asks you the following:
How much do you expect to spend on your home? - How large a down payment can you afford?
- Down payment percentage
- Interest rate (%)
- Loan term
5. Use gifts, bonuses, and windfalls
Some homeowners don’t find a 15-year mortgage or increasing the size of payments a good idea. If this sounds like you, then this option to build home equity over a longer period of time might be for you.
Look for an extra source of cash that goes here and there. Convert those holiday and birthday gift cards into cash. Add them to your mortgage. Over time those can go a long way. The key here is to pile up your resources no matter how little.
For those lucky enough to inherit money, use part of it to pay down your mortgage. Listen to your mortgage servicer on how to do this properly. Like the tip #4, make sure the money goes to the principal, not the interest. You’re trying to build home equity.
6. Earmark your partner’s salary
For couples who wish to build home equity faster, they choose to live on one salary. The other person’s paychecks instantly go towards the mortgage payment. This technique demands teamwork from you and your partner. Big rewards require much sacrifice.
HOME EQUITY BOTTOM LINE:
When you buy your dream property, you bring home lots of advantages under one roof. You can have access to better schools, comfortable shelter, and vibrant neighborhood.
Without you knowing it, home buying affords you a forced savings account.
As you build home equity, you can enjoy a resource to tap whenever you hit an unexpected expense. Home equity is also an asset you can use to upgrade our home or send your kids through college.
You can draw on your home equity with a line of credit or home equity loan to fund your big life expenses. Note that building equity is often a worthwhile journey, but it shouldn’t get the best of you. Keep your financial life in balance by responsibly paying off debt in ways that go best with your budget.
The 6 ways to build home equity listed above calls for a common theme: you need to stick to a lifestyle that benefits your long term goals. Those small changes in the monthly payment amounts or big decisions involving that 15-year mortgage payment, the benefits are all on you when the time comes. Pick the scheme you can commit to, stick to it and have your future self to thank you.
