What Exactly is Home Equity?
Your Home Equity is the portion of your home that you actually own. It’s determined by the current value of your property, minus the amount of liens secured against it. For example you own property that’s worth $300,000, and you have a mortgage with a loan balance of $100,000, your equity in the property is $200,000. Many times home buyers rely on their equity in their home to help purchase their next home. The more equity you have in your current home, the larger your possible down payment for your next home.
Security with Home Equity
Home equity equals security for many people. The more equity you have in your home, the more financial leverage you have, and that’s a good thing! Wondering how to build your home equity faster? In the early stages of a mortgage loan, a very small amount of your payment goes toward the principal, and unfortunately this builds the equity extremely slowly.
In order to build your equity, it comes with a price, usually in the form of larger payments. One trap you want to avoid is becoming house-rich and cash-poor. Remember, if you want to build your home equity and it means incurring more debt, then you defeated the purpose of building equity in the first place.
Making Additional Principal Payments
A good option in home equity building is to make additional principal payments if you can. One way to do this is to ask for a bi-weekly mortgage, where you make two payments per month (when added together it equals one monthly payment). By doing this, you will make the equivalent of 13 monthly payments per year instead of 12 payments. This may seem insignificant to some people, but a 30-year loan with a bi-weekly payment plan is typically paid off in 20 years.
Before you start making any extra principal payments, you can use the mortgage calculator on my website to do the math for you. Find out how much interest you will save if you made additional principal payments, and how much time it will take off your loan and increase your equity.
Refinancing to Build Equity
Another way you can build your home equity faster is to refinance your current mortgage loan. In most cases, the reason consumers refinance is to lock in a lower interest rate and lower their monthly payments. However, you can also refinance your loan in order to shorten the term of your mortgage, which will also build equity faster. By doing this, you’ll likely increase your monthly payment amount.
The Best Option to Build Equity - Appreciation of the Home
Appreciation is when your property value increases. In past years, homeowners have seen their equity grow due to home price appreciation. Although the real estate market has slowed down since its peak, many consumers are still seeing their homes appreciate in today’s market.
Wondering how much equity you have in your home? Find out now