Simply defined, home equity is the percentage of your home’s value that you own, and it is the key to building wealth through homeownership. It can be your greatest financial asset, your largest component of personal wealth, and your protection against life’s unexpected expenses. Here are six ways on how to successfully build your home equity!
Building equity through appreciation can take little time or a lot, depending on the market. With home prices going up like they have in recent years, appreciation has been a boon for many homeowners. Price increases, however, can also be linked to inflation and not a real appreciation of the value of the house. The biggest determining factor on home appreciation, however, is location, location, location!
Equity is easy to calculate when you first buy a home because it’s basically your down payment. For example, if you put $12,500 down on a $250,000 home, your down payment is 5% and so is your equity. So essentially, the larger the down payment, the more home equity you will build from the start. However, this decision should be based on your financial situation and what loan works best for you. A good loan officer can help you strike the right balance with the down payment, monthly budget and savings for other priorities.
Take advantage of any financial windfalls or gains that come your way. Work bonuses, family gifts and inheritance sums can go a long way in paying down your mortgage quicker while also building home equity faster.
To pay off their mortgages faster and pay less in interest over the loan’s lifetime, some homeowners choose to make bi-weekly payments instead. Bi-weekly payments mean that you’re paying half your monthly amount once every two weeks instead. There are 52 weeks in a year, so this works out to 26 bi-weekly payments or 13 monthly payments.
15-Year vs. 30-Year Mortgage
If you opt for a 15-year mortgage or refinancing into one from a 30-year loan, you will heap on the equity while also enjoying a lower interest rate. Also, since you will pay interest for a shorter period, you will save a lot on the total interest. Just remember that your monthly payments will be higher with a 15-year home loan.
Investing in big improvements like new kitchens, or additional bathrooms or other rooms will add value to a house. Make sure the cost of such improvements will create the added value you want. As you ponder your options, also consider your market. In a buyers’ market, you’ll likely need to do more work to help your home to stand out while you will face less competition in a sellers’ market.