5 simple steps to building home equity
5 simple steps to building home equity. You hear about it, but what is it? Home equity is an asset that comes from a homeowner’s interest in a home, 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 to build your equity
Here are five ways your home can create wealth for you. Some require time, money — or both. A lender can help you decide what works best for you.
- Reducing your mortgage balance – as you pay off your mortgage each month, you pay a portion of interest and a portion of principal. Every time you make your mortgage payment you’ll gain some home equity.
- Bigger down payment – you can make a larger down payment, in the beginning, to automatically acquire home equity. While this may seem like you’re putting money in an illiquid investment, more equity means a lower loan-to-value ratio, which equates to a lower interest rate and easier-to-obtain financing. Over time, that lower rate will mean less interest paid and more equity accrued.
- Larger mortgage payments – if you make larger payments each month, with the extra portion going toward principal, you will pay off your mortgage faster and gain home equity a lot quicker.
- Home Improvements and Maintenance – if you make smart home improvements, where the expected value exceeds the cost, you’ll increase your home equity by having a home that’s worth more. Make sure the cost of such improvements will create the added value you’re looking for.
Maintain your home in tip-top shape and you will be rewarded when it comes time to sell. If you can unload it for more, as a result, you’ve essentially created more equity in your home.
- Lastly, Appreciation – Patience is a virtue and if you’re not in a rush to use the home equity you’re building, you could wait until your home’s value goes up on its own. History shows it will likely happen naturally and as the market adjusts and home prices increase, the appreciation will boost your equity too. Building equity through appreciation can take time. If your in an area where the housing market and home prices will continue rising, you will gain equity simply because your home will be worth more.
How to use your equity
Your home equity can be a powerful asset. Here is how you can leverage it to the fullest. For those who are ready to make the most of their home equity, here are three options recommended by experts.
- Finance an expensive purchase – Using home equity to pay for a major purchase can make financial sense. Home equity loans often have low interest rates, and interest payments are typically tax deductible for those who itemize their federal return.
- Buy investment properties. Open a home equity line of credit in order to be able to pounce on investment opportunities as they occur. A home equity line provides the flexibility to get into a deal that you couldn’t [otherwise] get into, in particular, it may only be available to those who are able to make large down payments. Having a home equity line of credit open in advance means buyers can quickly access the cash needed to close a sale.
- Improve your home. One of the more common ways to use a home equity loan is to make renovations or upgrades to a property. There is an opportunity for a return on investment, You’re improving an appreciating asset. Use equity only for renovations that will give you greater enjoyment or longer use of the property.
Equity in a home can be a powerful financial tool if used correctly. Talk to your lender to determine the best approach for you when considering taking out a home equity loan.
