Want to create wealth through homeownership? BUILD EQUITY.
Home equity is the percentage of your home’s value that you own, and it’s key to building wealth through homeownership. Let’s take a closer look at how to build home equity without blowing your budget — and how to access it when you need it.
How Much Equity Do You Have?
Equity is easy to calculate when you first buy a home because it’s basically your down payment. For example, if you put $11,250 down on a $225,000 home, your down payment is 5% and so is your equity.
How to Build Your Equity
Here are five ways your home can create wealth for you. Some require time, money — or both.
- Let your home appreciate
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 home owners.
2. Use financial windfalls
Take advantage of work bonuses, family gifts and inheritances to pay down your mortgage. If you do pay down in lump sums, see if your lender will recalculate (or “recast”) your payment based on the new, lower balance.
3. Make biweekly payments
Make mortgage payments every two weeks instead of once a month. Over the course of a year, this will add up to 13 monthly payments instead of 12. You’ll build equity faster and shave five to six years off a 30-year mortgage. Just make sure your lender isn’t charging extra for processing semimonthly payments.
4. Cut your loan term in half
Take out a 15-year mortgage instead of a 30-year mortgage, and you’ll build equity twice as fast. Two caveats here: You’ll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying.
5. Make home improvements
New kitchen appliances or cosmetic features like paint are unlikely to increase value. Only big improvements like new kitchens, additional bathrooms, new windows, roof or heating and cooling equipment can add meaningful value. Make sure the cost of such improvements will create the added value you’re looking for.
How to Use Your Equity
You must borrow or sell your home to use your equity. The three most well-known ways to get to your equity through borrowing are a home equity line of credit (HELOC), home equity loan or cash-out refinance. Always compare the pros and cons of each.
Rates are on the rise, so these borrowing options might cost more in the future. Call me today if you are curious about the value in your home or to be contacted with the right local lender to determine the best approach for you.