How to Build Home Equity
Becoming a homeowner comes with a seemingly endless list of expenses. From upfront costs like your down payment and closing costs, to unforeseen repairs, insurance, taxes, and more, it’s sometimes easy to feel like your home is more of a financial burden than an asset.
But, that’s not entirely true. Each time you make a payment on the principal balance of your mortgage, you slowly increase the equity in your home. This can be a useful card to have up your sleeve.
What is home equity and why it matters
Home equity is the percentage of your home that you own, freehold. Calculating your equity is as simple as taking the fair market value of your home minus what you owe on it. Remember that it will fluctuate as the market value of your home changes and you make payments on your mortgage.
“Building up home equity can be a great way to prepare financially for retirement or achieve other long-term financial goals,” says Alex Shekhtman, CEO and Founder of BLC Mortgage.
A home equity loan can help you build long-term wealth in several ways. Funds can be reinvested in your home through home improvement projects that will increase its market value and help you make a profit if you sell. Or you can use a home equity loan as a down payment on a rental property to start a passive income stream.
Other expensive milestones like you or your child’s education can also be financed with a home equity loan. Although there are risks, a home equity loan can provide an additional, more affordable financing option for the more expensive stages of life.
There are many things you can use to pay:
- House upgrades: Major home renovations or upgrades can be expensive. However, you have the option of using your home as collateral for a home equity loan to help cover the cost of these projects. These upgrades can dramatically increase the value of your home and help you increase that equity even further.
- College costs: Home equity loans tend to have lower borrowing rates than other types of debt. You could use a home equity loan to pay tuition. Just keep in mind that this option is risky as it could put you at risk of losing your home if you fail to repay the loan. You might also miss some loan protections and forgiveness programs available to federal borrowers.
- Debt Consolidation: If you have high-interest debt balances, you can use a home equity loan to pay off those balances and get a lower APR. Say you have a large balance on a credit card with an APR of 17%. Consolidating and paying off your original balance with a home equity loan that offers a 7% APR could significantly reduce the amount you pay in interest each month and the time it takes you to pay off the balance.
- Emergency expenses: Using a home equity loan or HELOC to cover an emergency expense should never be your first resort. You should aim to build a healthy cushion in an emergency fund to cover unexpected expenses. However, having equity to borrow against can be a useful financial safety net in a difficult situation.
There are many reasons why you may decide to take out a home equity loan or HELOC, but the risks remain. Using this type of financing can give you access to lower interest rates and more manageable terms, but you could end up owing more money if your home’s value drops. You could also lose your home completely if you find yourself unable to repay the amount you have borrowed.
5 ways to increase the equity in your home
So how do you increase the equity in your home? There are a few approaches you can take.
- Make a larger down payment: Building home equity starts the second you put down a down payment on your home. Some homeowners put up to 20% of the purchase price of their home, others start with as little as 5%, depending on the type of financing they have obtained. So making a bigger down payment means you’ll have more equity in your home to start with, giving you a head start on paying off your mortgage sooner.
- Make additional payments for your mortgage: Paying more than the minimum monthly payment on your mortgage is one way to speed things up. Larger payments will reduce the time it takes to pay off your mortgage in full and increase the rate at which you naturally build equity.
- Home Improvement Projects: Some home improvement projects can increase the overall value of your home and, therefore, increase your home’s equity. According to Remodeling Magazine’s 2022 Cost/Value Report, improvements such as replacing a garage door, adding a deck, or adding new siding and windows to your home can all provide a significant return on investment.
- Choose a short-term mortgage: Opting for a 15-year mortgage, for example, rather than a standard 30-year mortgage, means you’ll pay off your home in half the time, build equity much faster, and save money. money on interest. Just know that with this option, you will have less time to spread out your mortgage payments and will be responsible for a larger monthly payment.
- Refinance into a shorter-term loan: If you’ve already paid off a significant portion of your longer-term mortgage, you can refinance your mortgage and take out a home equity loan for more than you currently owe on your home. This is called a cash refinance, and it will give you extra cash to tap into for any major home improvement projects or upcoming expenses. However, the same risks of higher monthly payments and potential foreclosure apply.
How long does it take to build capital?
Building capital takes time. In fact, a common rule of thumb in the real estate industry known as the “five-year rule” states that homeowners should be prepared to hold their home for at least five years before even considering selling. to recover their initial costs and avoid any risk of losing money. The idea behind this rule is that your home will increase in value over time and the more equity you have accumulated, the less likely you are to lose by selling.
The exact time it will take you to build up equity in your home will depend on the strategies you use to get there. If your strategy is to make your monthly mortgage payment and let time do the work for you, it might take a little longer than someone looking to speed up the process by making extra payments and investing in upgrades. home to increase his net worth.
The take-out sale
Your home is one of the largest and most important investments you can make. And getting the most out of that investment requires actively working to build and maintain the equity in your property. Even if you don’t plan to sell your home in the future, the equity in your home can provide you with an extra layer of financial protection and stability.
EDITORIAL DISCLOSURE: Any advice, opinions, or rankings contained in this article are solely those of Fortune Recommends™editorial team. This content has not been reviewed or endorsed by any of our affiliate partners or other third parties.