Want wealth through home ownership? Here's how to build equity.
Home Equity is the percentage of your home value that you own. Home equity is the way to create wealth through home ownership. Lets dive in on how
to build home equity and how to access it when you need to.
How much equity do you currently have?
When you first buy a home, it is easiest to calculate your home equity. In this case, your equity is basically your down payment. For example, lets say you put down 20,000 on a 400,000 home, your down payment is 20 percent, as well as you home equity.
Most first-time home owners in the US start with about 7 percent equity. Repeat home buyers begin with higher equity, averaging around 17 percent. It is often assumed that you need to put down 20 percent down before purchasing a home, but this is not true.
How do you build equity?
Here are six different ways your home can create wealth for you. A lender is able to help you decide what works best for you.
1) Allow your home to appreciate
This method can take some time depending on the market. In the recent years, home prices have been going up and appreciation has been great for many home owners. Home appreciation is similar to buying a stock as the value goes up. It differs from a stock because you are exempt from paying taxes on primary-home capital gains up to $250,000 or $500,000 for married couples.
2) Make a larger down payment
Starting out with a larger down payment is an option, however taking the time to save up extra cash may go against your financial interests. It is important to have a strong balance among your down payment, monthly budget, and savings for other life expenses. Having a good lender can provide valuable insight on rate and markets to help you do this.
3) Take advantage of financial windfalls
Use work bonuses, family gifts, and inheritances to pay off your mortgage. If you do end up paying in lump sums, see if your lender will recalculate your payment off of your lower balance.
4) Make your payments biweekly
Instead of making mortgage payments monthly, make them every two weeks. Over a year, this will add up to 13 monthly payments rather than 12. This will help to build equity faster and shave up to 6 years off of the standard 30- year mortgage. If you chose to go this route, confirm that your lender is not charging you extra for processing semimonthly payments.
5) Cut down your loan term
If you take out a 15-year mortgage instead of a 30 year-mortgage you'll build your equity twice as quickly. With this method, you must consider significantly higher monthly payments and more difficulty qualifying.
6) Make home improvements
Although new appliances and small cosmetic features like paint look nice, they wont increase your home value. Big improvements such as new kitchens, additional bathrooms, or extra rooms will add significant value.
How to use your equity
To use your equity, you must borrow or sell your home. The three most common ways to get your equity through borrowing are a home equity line of credit, home equity lone, or cash-out refinance.
Rates are currently on the rice, so these options may cost more in the future. Be sure to talk to your lender to decide what the best approach is for you.