Not every homeowner might realize it, but home equity might be their most valuable piece of possession.
It is something you should consider before you decide to buy a new property. And with enough knowledge and careful planning, you can reap long-term benefits from your home equity.
What is Home Equity?
A home equity is a portion of your home value that you truly own and can grow over time. It is your home’s market value minus the amount that you owe on it. It is the homeowner’s interest in his/her home.
For example, you purchased a property for $100,000, made a 20% down payment, and availed of a home loan to cover the $80,000 balance. Given this, your current home equity is 20% of the property’s value – which is $20,000. Although you are considered the property owner, you only officially “own” $20,000 of its value.
How did home equity become your interest as a homeowner? A property’s market value increases over time, which means your home equity grows as the value of your property grows.
Consider building your home equity as an investment. When you build your home equity faster, you will incur lower interests and have more opportunities to earn.
As a homeowner, there are various ways towards building up your home equity faster. We’ve listed the six best ways that you can do this.
1. Choose the Perfect Home Loan for You
There are different types of mortgage loans that homebuyers can choose from. The loan you get should depend on your income, the amount of downpayment you will be able to pay, and the price of the house you intend to buy.
For example, first-time homebuyers might want to consider government-issued mortgages since they might have low cash savings and want more relaxed credit requirements.
Different types of mortgages have their pros and cons. Each lender has their own interest rates, terms and conditions, and requirements that might affect how fast you can build your home equity.
Before deciding on a home loan, compare each mortgage plan first to find out which best suits your status and needs.
2. Make a big down payment.
When buying a property, consider paying a big chunk for the down payment. Since your down payment will determine your initial home equity, a bigger payment means higher equity.
It will also help your home equity grow faster. For example, when the market value of your property doubles, you get a bigger share immediately vs. if you started with a lower down payment.
Making a big down payment will also lower the total amount that you owe to your lender; hence, making it easier to pay for your monthly fees.
3. Make Home Improvements.
Some might not think home improvements and renovations are important, but it’s actually a great way to boost the value of your property. When you do remodeling and improvement projects, the value of your home appreciates and so does your home equity.
However, you should also be also mindful of the amount you spend on remodeling. You might end up spending more rather than increasing your home equity. Not all improvements need to be big. It can be as simple as adding attic insulation or replacing your garage door.
Before proceeding with a renovation, it would be best to seek advice from a real estate agent to know how to get the most returns on your improvement projects.
4. Accelerate your monthly amortization
Payment options depend on the country you live in. There are countries that offer monthly, bi-weekly, weekly, and even accelerated weekly and bi-weekly payments. Choosing the right payment method depends on your income and how much of it you are willing to dedicate to your monthly amortization.
Choosing a bi-weekly or weekly option means that you’ll be paying 13 months a year instead of just 12 months (do the math). Meanwhile, an accelerated option means that you’ll be paying an extra amount with each payment.
It might seem heavy for your pocket, but trust me, it will benefit you more long-term. These options will help you save on a huge amount of interest and help you build your home equity in a shorter time period.
5. Opt for a Shorter Loan Term
Choosing a shorter term for your mortgage means that you will have a lower interest. This is great because it means that most of your monthly payments will go to your principal instead.
It will also help you save time in building your home equity. The faster you pay your loan, the sooner you get full equity and reap the benefits that come with it.
However, this also means that you need to pay a higher amount each month. So you should still carefully consider your budget before deciding on getting a shorter loan term.
If you already have a loan or if you can’t opt for a shorter-term right now, you can also refinance into a shorter loan term in the future.
6. Hold on to your property and wait for your home value to rise
Most people choose to invest in real estate since the value increases over time. The longer you hold onto your property, the higher home equity you can get.
However, this doesn’t always mean that your home value will consistently increase over time. Since local housing markets change, your home value may also fluctuate.
So to get a higher return, wait until your home value increases before you sell your property.
Consult with a professional to check your current home value and to know when the best time to let go of it is.
It might seem overwhelming but it is totally worth it.
Building your home equity might seem overwhelming at first, but it can be a breeze with proper planning and dedication. If you follow these six steps, you’ll be able to maximize the long-term benefits of your home equity.
It’s also important to recognize how important home equity is. Consider it as an investment or a forced savings account. You can use it to fund your retirement, rent or sell your home, and fund emergency expenses. You can even pass it down to your kids.
You can get the most out of what you are paying for when you build your home equity faster. It’s actually a win-win situation – you get to have a comfortable home while growing the value of your property.
Now all you have to do is plan, commit, and take care of your home.