Getting a mortgage moves you a step further in your homeownership journey. Simply put, equity makes up the amount of your home you own.
Experts consider home equity as an asset since it’s your financial stake on your property that can translate to quick cash. Calculate the amount by subtracting the market value of the property from the mortgage you owe. The more payments you make, the higher the equity.
Whether saving towards your retirement or college fund, converting your home equity to cash can come in handy on rainy days. However, take strategic steps regarding withdrawals to maximize the returns on your property.
Check out these seven tips on how to build equity in a home:
1. Make A Big Down Payment
Making a big down payment is one of the best tips on how to build equity in a home. Your down payment sets off your equity value. While sticking to the required minimum payment paves the way to own ownership, there’s also value in making a sizeable down payment. Depending on your options, it’s possible to start with about 5% of the home value.
For equity-building purposes, consider putting down up to 20% of the home value. This boosts your credit score and increases the value of the equity in your home. Avoid paying Private Insurance Fees depending on the laws of your state. Before making this decision, go through your finances and running costs. Create an emergency fund saved up and leftover cash to cater to your monthly mortgage payments.
2. Remodel The Property
Beyond making prompt mortgage payments, building equity also depends on the value of your home. The higher the worth of your home, the higher your stake in your home. This will help to build your home equity line of credit.
Home improvements can increase the value of your property and boost equity. However, remodels only provide 64% returns on investment. Before rushing into home makeover mode, consult real estate experts and home professionals to determine which projects will contribute to the property value.
Consider cheaper remodels like new garage doors, fresh paintwork, light fixtures, and attic insulation. Beautifying the curb with flowers and foliage also boosts the overall appearance of the property.
3. Make Larger Mortgage Payments
Like every loan, larger payments reduce your loan term. The hack for building equity is to pay off your mortgage. The quickest way to do this is by adding a chunkier amount to your monthly payment. In the beginning, the bulk of these payments will go to interest.
The easiest tip for making larger payments is to round up your monthly mortgage to the next hundred. For instance, if your bill comes at $1130, consider paying $1200 monthly instead. Consider putting extra cash like tax payouts, gift cards, and bonuses towards your mortgage.
4. Refinance Your Mortgage
If you qualify for a refinancing loan, consider applying for one to offset your mortgage loan. This loan allows you to pay off your current mortgage at a lower interest rate. Refinancing your mortgage to a shorter loan term enables you to pay off your home loan quickly.
Securing a refinancing loan requires a good credit standing. Many homeowners experience a lower credit score after securing a home loan. Keep in mind that refinancing to a shorter-term loan also attracts higher monthly payments. Consider your financial strengths to avoid falling short on your mortgage.
5. Pay Your Mortgage Biweekly
Another way to offset your home loan is by paying your mortgage twice every month. Many mortgage brokers offer biweekly payment plans. With this option, you’re required to make two payments each month, compared to the monthly cycle. The payment must add up to a minimum of your total monthly balance.
Since there are 52 weeks in one year, you’d put more money annually towards your mortgage when you opt for biweekly payments, compared to making 12 payments in one year.
6. Bank On The Rising Real Estate Market
The prices of houses go up annually, depending on the location of your property. When home prices rise, the value of your home also goes up, opening an opportunity to build equity. After remodeling, you can bank on the current rise in real estate value if you’re patient enough to wait.
However, keep in mind that housing markets are unstable during an economic crisis. This fluctuation can lower the value of your home, costing you some equity. Stay on top of the real estate market using price estimators or by consulting your financial advisor.
7. Rent Out The Property
Many homeowners save costs by renting out their property and using the monthly payments towards the mortgage. Beyond saving money, renting part or all the rooms in a home provides an opportunity to build equity. From Airbnb to traditional renting, there are many ways to reap profits from leasing your property.
If the rent covers all the mortgage, consider making frequent extra payments so that you can pay off the loan faster.
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