How to Build Home Equity
Building equity in your home can take time, but even more so equity you have, the more money you can borrow to meet larger expenses. homeowner access their home equity when they need funds for life events such as paying tuition, home renovations or to pay off high-interest consumer debt like credit card debt.
Mortgage lenders prefer that you have at least 15% to 20% of the equity built up in your home before they will give you a loan. It can take the average homeowner about five to 10 years to build up that amount of equity.
Read on to learn more about how you can start building more home equity now.
What is equity?
Equity is simply the difference between what you owe on your mortgage and the current market value of your home.
As you calculate Equity capital is very simple: Subtract your mortgage balance from the market value of your home. For example, if you took out a $450,000 mortgage and have $200,000 left to pay back, you have $250,000 of equity. Building 15% to 20% equity can take up to 10 years for a typical homeowner a 30-year mortgage.
5 ways to build home equity
The way to build your home equity is to make steady mortgage payments over the years. The longer you pay off your mortgage, the more equity you have in your home.
1. Make a deposit
manufacturing a large deposit is one of the easiest and quickest ways to build equity in your home. The more you invest when buying a home, the more equity you have right from the start. Plus, if you put down a 20% or more deposit, you can eliminate the requirement for private mortgage insuranceor PMI, which can add hundreds of dollars to your monthly mortgage payment.
2. Focus on paying off your mortgage
You can always make an extra mortgage payment or two your budget permitted. If you make 13 or 14 mortgage payments a year instead of just 12, you reduce the interest you pay over the life of your loan and the time it takes to repay the loan. For example, if you get a tax return this year, you should use that chunk of money for yourself mortgage instead of saving or investing – if you can afford it.
3. Pay more than the minimum
Just like credit cards, pay off your debt faster when you make more than the minimum payment owed each month. The same applies to mortgages. If you can pay $100 or $200 more on your home loan each month, you’ll reduce the interest you pay on your mortgage over time. Plus, like most mortgages, when you make a payment, only a portion of it goes towards paying down the principal of your loan — your payment also goes towards paying down interest or items like PMI. Take the time to understand the terms of your mortgage and how your money will be used to repay your loan to your lender.
4. Stay in your home for at least five years
To the most homeowners, it takes about five to 10 years to build 15% to 20% of home equity. So if you’re looking to move five years ago, it might not make sense to tap into your home equity because you might not have built up enough. Home values also increase over time. So if you don’t stay for at least five years, you won’t be able to benefit from the appreciation in your home, which of course gives you more equity in your property.
5. Renovate and polish
Home renovations are a great way to use your home equity as you increase the value of your home while enjoying your investment. Also, there are tax advantages to accessing your home equity with certain types of home equity loans. If you use for example a home equity line of creditor HELOC to complete any home improvement, the interest on your loan is tax deductible.
The final result
Building your home equity is important because it gives you access to cash, often at low interest rates. Home equity loans are a reliable way to get money without having to sell your home or take out higher-interest financing options like personal loans. As long as you have at least 15% to 20% equity accumulated in your home, most mortgage lenders will let you borrow up to 85% of your home’s value — provided you meet the rest of their requirements for aspects of your financial life like yours credit-worthiness and your income.
Remember, when you borrow against your home equity loan, it’s a secured loan: it’s you Using your home as collateral to secure your equity loan. That means your bank or lender can repossess your home if you fail to make your payments. Make sure you can comfortably afford the monthly payment that comes with a home equity loan (often called a second mortgage) on top of your first mortgage payment.