boost your home’s equity
Your home equity is a powerful asset, giving you the flexibility to borrow through a home equity loan or HELOC.
Home equity is important to have for many reasons, including to borrow against it in the form of a home equity loan or home equity line of credit (HELOC). Home equity represents funds you can use to do any of the following, or more!
- Funding home remodeling projects
- Consolidating debt
- Paying for college education
- Even paying for medical expenses, a child’s wedding, or a once in a lifetime vacation
How is home equity calculated? It’s essentially your home’s current value, minus the amount you owe on your home.
The equation would look something like this:
Current value of your home: $200,000
– Remaining mortgage balance: $125,000
Home Equity: $75,000
But, building home equity takes time. Each month, a portion of your mortgage payment goes toward the loan principal. You build equity as your principal decreases, which, of course, usually occurs over many years. If you want to speed up the process so you can build equity faster, here are four things you can do.
1. Make a Larger Down Payment
The down payment you make when buying a home goes directly toward the loan’s principal. If you make the traditional 20 percent down payment (which allows you to avoid Private Mortgage Insurance or PMI), then you have 20 percent equity in your home from day one.
If you use loan programs like FHA requiring five or even three percent down payment, and only pay the minimum amount, you’ll have considerably less equity in your home. It’s almost always better to make a larger down payment, when possible.
2. Choose a Shorter Term
The average mortgage term is 30 years. If you choose a 10, 15, or even 20-year mortgage instead, you’ll build more equity in your home every time you make a payment. The shorter the loan term, the more equity you grow at a faster rate.
The added benefit is that shorter loan terms mean you’ll pay off your mortgage quicker and pay substantially less interest over the life of your home. However, shorter loan terms do mean your monthly payments will be higher than longer terms. It’s essential to make sure you choose the right term for your current budget.
3. Use Equity to Build Equity
If you already have some equity in your home, you can use a home equity loan or home equity line of credit (HELOC) as an opportunity to reinvest in your home through remodeling projects. The key is to research your area to determine which improvements add value to your home and which may work against you.
For instance, in some areas of the country, a pool adds value. In others, not-so-much. Work with local realtors or appraisers before you embark on a remodel to estimate your project’s potential returns.
4. Pay More Toward the Principal
For many, this is the simplest solution. Paying extra toward the principal of your mortgage each month will help you build equity faster while also helping you pay less interest and pay your loan off sooner.
Before you do this, make sure your mortgage does not have prepayment penalties. Then pay a little extra toward your loan each month or whenever you can financially afford to do so. It’s important you tell your lender to apply the additional amount toward the principal balance on the home. Another option is to choose bi-weekly payments, which help you pay an extra mortgage payment each year toward the principal.
