You may have heard the term home equity- but do you understand what it is and why it is so important?
It is something you can build – and you should want to. But first, let’s ask what may seem like the obvious question…
What exactly is home equity?
Home equity is the part of your property that you actually own, lien free. For instance, if your property is worth $250,000, and your remaining mortgage balance is $100,000, then your equity in the property is $150,000.
Now that you have a basic understanding of what home equity is, let’s dive a little deeper into how you can build it!
Unsurprisingly, building equity in your often comes at a price…usually that price comes in the form of larger payments. However, if you’re thinking the only way is by incurring additional debt to make ends meet, then you are defeating the purpose of building equity. Taking on additional debt to try to build equity would really be digging yourself further into debt instead of enjoying the benefits of a more financially free equity build.
So, how can you really want to build equity. Here are some options:
One option is to make additional principal payments. One way to do this is to sign up for a bi-weekly mortgage in which you make two payments per month. These payments added together total one monthly payment. However, by the end of the year, you will make the equivalent of 13 monthly payments instead of 12. One extra payment per year may seem insignificant, but look at that extra payment over time… When making bi-weekly payments, a 30-year loan is typically paid off in about20 years. That saves 10 years of additional interest payments, and depending on your interest rate, the savings can be substantial.
Another way to build home equity faster is to refinance. For example, if you had a $200,000, 30-year ARM loan at 8.13% and replaced it with a 15-year, fixed rate loan at 6.75%, your monthly payment would go from $1,485.69 to $1,769.82. While the amount of your payment goes up, the interest paid over the lifetime of the loan would drastically decrease, and you would build the same amount of equity in half the time.
What else can you do?
Certain remodeling and/or improvement projects will boost a home’s equity – but not all will. Items such as a new roof, new garage door or remodeling a kitchen will add more value than a pool or solar panels. Any project will be better at increasing equity if you do not finance it.
Naturally, your equity increases with each house payment you make. And when home prices rise, your equity is accelerated as your home’s value increases.
Building home equity is a worthwhile venture when done right. The benefits of having that equity can mean you will receive cash if you sell the home and pay all related costs, you can borrow against it with a home equity loan or home equity line of credit (HELOC) or use it for a down payment on your next home purchase. Or you can just enjoy the future mortgage free!
For specific information regarding the best course of action, consult your financial professional or mortgage lender. And if you need assistance buying or selling, let me know! I’m here to help you any way I can!
Have a beautiful day!
Diane