Building equity in your home can result in lucrative financial benefits in the long run. You don’t reap the rewards whilst it’s happening, but it does build wealth since you end up with a significant asset. But what exactly is home equity, and how can you benefit?
What is home equity?
Home equity is the market value of the homeowner’s burdenless interest they have in that property.
This can be easily calculated by looking at the market price of the property and extracting what the loan is left to pay back on the mortgage.
Therefore, the more money you invest into your home equity, the less time you will have to be paying it off.
So, now you know what home equity is we’re now going to expand and give you our best tips for building that equity in an efficient and effective way.
A large down payment
If you’re already a home owner and are settled in that property, this may not be as applicable to you as someone on the road to making a property purchase, but it may be helpful when and if you make a new purchase.
Home-buyers that are taking out a loan to pay for their property, the conventional route, should put down the largest down payment that they can afford.
This will be money that should be seen as investment as you will not have access to this money for years, possibly decades. However, the higher you can make this down payment, the more equity you will have in your home.
A good down payment would be considered as 20% of the property’s value, however, the larger the down payment the more favourable your position will be.
Renovate your property
Modernising your property will not only make it aesthetically pleasing but will also increase your home equity, potentially by a significant amount too. This applies to both the interior and exterior of the property.
This doesn’t necessarily mean that you have to go knocking walls through and converting your garage to a fourth bedroom, this could simply mean a lick of paint in your kitchen, or a new carpet on your stairs.
Little changes could make all the difference and keep your property modern and up to date will mean its value has the potential to increase, when you come to resell.
Pay out more than what is asked of you
We understand that, at times, having a mortgage can put a financial strain on the property owner(s), however to build your home equity we recommend that, if you’ve had a really good month at work, or you’ve saved a little more money then you planned that month to put that money into your property.
With fixed interest rate mortgage products, lenders will typically allow 10% overpayments of the amount outstanding per annum without penalty of early repayment charges. Whereas, with variable interest rates such as Trackers and Discounts, there is often no limit in regards to overpayments.
However, we advise that you check with your mortgage provider to clarify the terms of your overpayment facility
By even slightly increasing your mortgage payments each month you will see a huge difference in your home equity.
This could knock years from your mortgage repayments if you are consistent so it is definitely worth pushing yourself, if you can afford to do so.
Focus on paying off your mortgage
Even by just paying your mortgage payments you are increasing your home equity. It is a good idea to find out how much equity you have in your home and how much of your mortgage you have left to pay for you to make reasonable and sensible choices for the future.
If you can stretch for higher amounts to pay your mortgage off each month (see point 3) then that’s great, but if not, just know that you are still increasing your home equity just by paying what is asked of you.
By increasing your mortgage payment you could save yourself money in the long run as you will reduce interest over time. It may also be possible, if this is within your budget to pay twice a month towards your mortgage, if you really want to increase your home equity and deduce the period left to pay your mortgage.
However, always check with your lender, before making any additional payments, that you will not be charged a prepayment penalty. Although most lenders, especially if your loan is FHA, VA, or USDA, will not charge a penalty, it is always best to be 100% certain as you do not want any hidden fees to crop up at a later date.
Shorter loan terms
This can be achieved both when you are first applying for your mortgage and if you are already in a fixed mortgage, you can chose to refinance and choose a shorter loan term.
This will build home equity in a much smaller period of time, all mortgages are different and depending on your financial situation, you may be able to refinance your mortgage to around 15 years.
However, with a shorter time to pay off the same loan, means that the monthly payments will increase to potentially double their previous value.
It’s also good to consider that this option will not necessarily be available to everyone, you will more than likely have to have good credit, a low debt-to-income ratio and have a home equity over a certain value already.
Therefore it is a good idea to check your credit score ahead of time. You can do this quickly and easily using Experian.
If you do qualify however, may we recommend that you stay clear of cash refinancing. You will find this counterproductive as the idea of refinancing is to increase your home equity. If you chose to cash re-finance, you could find that your mortgage will be even bigger than when you first started.
Wait for your property’s value to rise
Whilst this point may not apply to all property owners, especially those who are eager to climb up the property ladder, it may be worth considering.
Like all investments, the market fluctuates on a daily basis, however, history has shown that naturally house prices do increase, and therefore the property owner’s home equity will build if you sit on the property for a while.
Although the market can decline and you could lose money, it is more than likely the value of your property will increase and you would be a few grand better off if you wait for your property’s value to rise before making any moves.
Let your future self be thankful and begin to build your home equity today. Follow these 6 small steps and see your equity build through the years. Take little steps and we can guarantee that your home equity will grow through the years.