The What, Why and How of Building Home Equity

Buying a home in one of the best investments you can make for personal as well as financial reasons. Yes, it is a huge investment, one of the biggest ones you will make. While not many can purchase a home outright, the good news is that you are consistently building equity with every mortgage payment you make, thus securing your investment and simultaneously building a nest egg.   

What is home equity?

Simply put, equity is ownership. It is the portion of your home’s value that you have paid off and now own outright. So, if your home is worth $250,000 and you still have $100,000 in loan payments, you own $50,000 of the home. This is your home equity.

Why is building home equity desirable?

If you divide your finances into two columns – assets and debts – home equity is a valuable tick in the assets column. Remember, equity equals ownership. The equity you have in your home can be converted to cash or serve as the basis of a home equity loan to fund home improvements, your child’s education, or unexpected expenses. The more equity you have established, the bigger the loan. Think of it as forced savings you can draw on when needed.

How do you build home equity?  

There are multiple ways to build equity, which is good because the more equity you build, and the quicker you build it, the more leverage you have with your finances.

1. Funnel as much money as you can to your down payment. While there are loans that allow you to purchase a home with 3%, even 0%, down, make your down payment as large as you can to kickstart the equity you will build over time. The more money you earmark for a down payment, the more equity you will have already established come move in day. 20% down will carry the added benefit of negating the need for private mortgage insurance (PMI). 

2. Commit to paying off your mortgage loan early. Taking little, consistent steps to whittle away at your mortgage will have a big impact on your equity. Pay more than your loan payment each month, even if the amount seems too small. Consider rounding up to the next $100 increment of your payment.You’ve heard financial experts advise to make more than the minimum payment on a credit card balance. The same principle applies. If you do pay extra, make certain this money goes toward the principal of your loan and not the interest. Divide your monthly payment into a biweekly payment. Doing so will add another mortgage payment a year. If you finish paying off student loans or a car, funnel that money toward your mortgage. Pay down your mortgage with bonuses, tax returns, birthday gifts, or portions of an inheritance. Just keep chipping away!

3. Refinance to take advantage of a lower interest or to shorten your loan term. If you originally took out a 30-year mortgage, try to refinance for a 15-year term. You’ll build more equity each month because higher payments carry lower interest rates, which means you are paying more principal and less interest. Interest rates are at historic lows. So now is the time to refinance your home to not only save money but also build equity.

4. Increase the value of your home. Boost your home’s value with home improvements. According to Remodeling Magazine, home improvements see a 64% return on investment. This doesn’t mean over-improving your home to the point where you price yourself out of a future buyer’s market. Select projects with the largest ROI, such as bathroom and kitchen updates. You also do not need to complete every item on your “To Do” list at once. Prioritize so you can pay cash as much as possible to avoid taking out a loan.

There are many steps, big and small, you can take to build equity in your home. The professionals at Aksarben Mortgage can advise you on which mortgage loans marry equity building for future security with your current financial situation. They can also help existing homeowners refinance to take advantage of record-breaking low interest rates. But maybe don’t ask them to wield a hammer as part of your weekend warrior project. 

For more information on which mortgage loan is right for you, or to refinance for big savings, contact Aksarben Mortgage and start Experiencing Your Good Life today.

 

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.