Becoming a homeowner is a great way to plant roots in a community. It’s also your first step to building home equity. And the longer you stay in that house, the higher your equity could increase. Let’s get into the details of how building equity can turn your investment into an asset.
WHAT IS HOME EQUITY?
The difference between how much your home is worth and what you owe on your mortgage is called “home equity”. What does that mean money-wise? Let’s say your home is valued at $250,000 and you still have $150,000 to pay off on your mortgage, your home equity would be $100,000. If you are up for doing the math, here’s a quick equation to help you find your home equity:
Home Value – Remaining Mortgage Principal = Home Equity
As you pay down your mortgage and if your home value changes, you will see changes to your home equity as well. When you have paid off your mortgage, you will have 100% home equity.
HOW DOES HOME EQUITY WORK?
Basically, home equity is any part of the home value you own outright. So, if you get a mortgage and make a $17,000 down payment you would effectively have $17,000 in home equity at that time. Your equity will continue to grow as you continue to pay down your mortgage.
Is it possible to increase your home equity? Of course! In fact, a CoreLogic report stated homeowner equity increased by $1 trillion from the end of 2021 to the end of 2022. However, it can take several years to build substantial home equity, so you have to think long-term if you want to gain home equity. Read on for home equity building tips.
5 WAYS TO BUILD HOME EQUITY
Building home equity doesn’t happen overnight. But there are some things you can do to get the ball rolling. Try these approaches to building equity in your home.
- Increase the value of your home. Making some home improvements can help increase the equity in your home by increasing its value. Whether it’s updating your flooring or adding a pool, home renovations can help boost your equity. And with the right renovation mortgage you can get the job done easier.
- Make a larger down payment. The percentage you pay for a down payment will become your initial home equity amount. So, if you make a 3.5% down payment you will have 3.5% equity of the home. Effectively, if you make a larger down payment you will likely have higher equity in the home from the start. If your budget can handle a larger down payment, talk to your lender about if putting more down is right for your loan.
- Pay a little extra. If it works for your budget, putting some extra money toward your mortgage principal can help build equity sooner. This does not mean you have to make a full extra payment. Rather, you could round up to the nearest hundred or make an extra half payment. The most important part is that you stay within your budget. An extra payment calculator can help you learn how much sooner you could pay off your mortgage.
- Say goodbye to PMI. Private mortgage insurance (PMI) might have been required on your mortgage if you paid less than a 20% down payment. Once you have built up 20% in home equity, you can talk to your lender about what your options are regarding your PMI. With that monthly insurance premium removed, you could put the extra directly to your mortgage to help pay down your loan faster.
- Make biweekly payments. Did you know that biweekly payments could help you pay off your mortgage early? By splitting your monthly payment into two biweekly payments you will effectively make an extra payment over the course of the year. Using a biweekly payment calculator can help you learn what you could save over time.
WHY IS HOME EQUITY IMPORTANT?
Wondering what all the fuss is about when it comes to home equity? One of the main reasons to pay attention to your equity is that it can be a road to building wealth. It can also be beneficial to you in the future as your home equity gives you something to borrow against if you ever want to consolidate high interest debt or have unexpected expenses.
As you build your home equity, it is important to know how you can utilize it in the future. Talking to a mortgage professional can help you understand how you can make your home equity work for you. Connect with your local PrimeLending loan officer today to learn more.
