Build Home Equity Faster
Home equity is the part of your property you actually own. For instance, if your property’s worth $250,000, and you have a mortgage with a remaining loan balance of $100,000, your equity in the property is $150,000.
Building home equity is an important part of homeownership because it’s a resource you can convert to cash when an expense arises. You can draw from the equity using a home equity loan or home equity line of credit (HELOC) or wait to cash in the equity when you sell the home.
Naturally, building home equity comes at a price, usually in the form of larger payments. If building home equity means incurring debt to make ends meet, then you’ve defeated the purpose of building equity in the first place.
Building home equity is important for a few reasons. It can not only be a reliable way to build wealth but also help you maintain the home while you’re in it.
Building equity in a property means:
- You can borrow equity for nearly any purpose. Homeowners can borrow against the value of their homes through home equity loans and HELOCs. With a loan, you receive all funds at once and immediately start paying them back over a period lasting up to 30 years. When you take out a line of credit, you have a draw period (often up to 10 years) when you can withdraw what you need when you need it and make interest-only payments. You then have a repayment period (typically 10 to 20 years) when you pay back both interest and principal.
- You will make a profit when you sell the home. You don’t want to find yourself “upside down” in a home, owing more on the property than you can recover in a sale. When this happens, the only way to sell is by getting your bank to agree to a short sale. Building equity means you will sell the property for more than you owe. You can use the profits for another home, pay off other debt, or invest it elsewhere.
- You can build long-term wealth. Building home equity can help you increase your wealth over time, especially if you purchased your home when the market was in buyers’ favor. A home is one of the only assets that has the potential to appreciate in value as you pay it down.
The first option in home equity building 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 (which added together equal one monthly payment). You will make the equivalent of 13 monthly payments per year instead of 12, which may seem insignificant. But a 30-year loan with a bi-weekly payment plan is usually paid off in about 20 years.
The other way to build home equity faster is to refinance. If you had a $200,000 30-year ARM at 8.13 percent and replaced it with a 15-year fixed rate loan at 6.75 percent, your monthly payment would go from $1485.69 to $1769.82. You would save $200,000 in interest and build the same amount of equity in half the time.