10 Intelligent Tips That Help You Build Your Home Equity

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Written By Peter Hollens

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Build Your Home Equity

Owning a home is a dream for everyone as it brings physical and financial security. Not only does a home give shelter for a lifetime, but also serves as a financial asset. Though most people associate the value of a house with its market price, there is another concept that indicates its true value. Home equity refers to the value of the portion of your property that you actually own. It is calculated by deducting any outstanding loan balances from the market value of the property. Considering the fact that the market value of your home may increase or the outstanding loan balances may decrease, the value of home equity is variable. This means that you can consciously increase it by repaying the loans (or house mortgage payments).

Home equity is regarded as the most valuable asset for a homeowner because it can be used anytime later in life, to help you through an unexpected expense or pay for a planned one. Massive expenses such as paying for a home upgrade or your child’s college fees can be handled by making judicious use of home equity, with a bridge loan financing or a line of credit. Bearing these things in mind, you should focus on building equity so that you can increase your borrowing capacity in the long run and be secure for a lifetime. This makes it important to understand the measures that you can take to build your home equity over a period of time. Let us guide you with 10 intelligent tips that can be of help:

1) Make A Larger Down Payment:

Make A Larger Down Payment

The smartest decision that a homeowner can make is to make a large down payment while buying the house. This is the instant equity that you can build and the more you can start with, the better will things be. However, you should not just keep waiting for extra cash to accumulate over time for the down payment as it can actually result in a lost chance of building equity through appreciation. The best approach is to strike a balance among savings and monthly budget so that you have enough saved for down payment by the time you plan to buy the property.

2) Focus on Reducing The Balance on Your Mortgage:

The most feasible way of building your home equity is to focus on bringing down the balance amount on your mortgage. Being consistent is the key as you can effectively clear both the principal as well as the interest by regularly paying up the installments as and when they are due. Stick to the due dates so that you do not fall out of the habit. Gradually, as you keep paying up, the mortgage balance reduces and the equity value rises consistently.

3) Pay More on The Mortgage:

Paying more on the mortgage is a smart way to reduce the balance and build the equity. If you do plan to take up this option, ensure that the extra money you pay is used to set off the principal rather than the interest. Talk to your mortgage service to arrange the same for you and also keep a watch on the monthly statement to check whether the payment is being credited correctly. Extra payments do help but they should be done to an extent that they do not crimp your monthly budget. There are various ways that you can try to increase the payments without feeling the pressure. For instance, target at making one extra payment every month. You can also try the option of biweekly mortgage payments instead of monthly ones so that an extra monthly payment goes in a year.

4) Reduce The Loan Term To Half:

Reduce The Loan Term To Half

Another smart way to build your home equity faster is by reducing the loan term to half; say 15 years instead of 30 years. This means that your equity grows twice as fast than it would if you take a full-term mortgage period for the property. Though your mortgage payment will rise by a significant amount, you can save a lot of interest too. The catch here is that you might experience difficulties while qualifying for the mortgage because you will have to prove that you will be in a position to repay the monthly amounts with your income. Real estate advisors such as hard money lenders Los Angeles offer counseling support to the prospective homeowners so that they can take the right decision and also ensure that they are eligible for half-term mortgages.

5) Use Windfalls and Bonuses To Reduce The Mortgage:

If the commitment of a half-period mortgage sounds too much for you, there are other ways that you can bring down the amount due on the property. Using unexpected windfalls like lottery money or inheritance to pay off a portion of the mortgage is a good decision. Similarly, you can utilize your yearly bonus for reducing the mortgage burden. Sacrifice your holidays and get your gifts cashed to pay up and be a smart homeowner. One thing that you need to clear up with your mortgage services is that the money you pay up is used for reducing the principal and not for paying off the interest.

6) Channelize Your Monthly Savings To The Budget:

Every homeowner has a monthly budget and makes efforts to reduce expenses so that he can save up at the end of the month. If you are one of the smart people who does manage to have some monthly savings, be smart enough to pay it up for the mortgage. No matter how small and insignificant the amount may seem, it will go a long way in increasing your home equity if you are able to do it every month.

7) Snowball other Savings To The Mortgage:

If you have been paying other loans and they have come to an end, snowball these savings to the home mortgage. Of course, you may be tempted to buy a new car once you have paid up the car loan on the old one, but it is wiser to get things prioritized. A smart homeowner is the one who makes conscious efforts to pay off the mortgage first and be secure with an increased home equity.

8) Build Alternative Sources of Income:

Build Alternative Sources of Income

While reducing your expenses and saving up more is a great idea, you can also try to make some extra money every month by building an alternative source of income. For instance, you can take up a part-time job or try a freelancing project to add some extra cash. The entire extra that comes in should be used to reduce the mortgage burden, which will automatically elevate your home equity.

9) Earmark one Partner’s Salary For Repayment:

Smart couples can do a great job at building their home equity right from the time they purchase a property. Since double-income households are likely to have higher savings, they can pay a bigger down payment and have a high equity right from the initial stage. Furthermore, if you and your spouse earn and can sustain with one person’s income, earmark the other’s salary for paying off the mortgage. You can even arrange an automated payment every month from your partner’s salary account so that you get into the habit of “forced saving”.

10) Make Regular Expenditure on Improving your Property:

The above mentioned points have all been focused on building the home equity by reducing the outstanding mortgage balance. There is also a second way that you can do it, which is by increasing the value of the property. You can be lucky enough if the market prices of real estate in your area go up, which usually happens over a period of time. At the same time, there are other ways in which you can contribute to boosting the value of your home and increasing its equity. Invest in home improvement or remodeling projects on a periodic basis. Maintain it well with regular repairs wherever and whenever they are required. Keeping up the appearance of the home is another good way to add to its value. However, the entire expense that you make on maintenance should preferably be done in cash rather than by loan. A loan can again increase the outstanding amount on the property and have a detrimental impact on its equity.

Home equity is a smart investment for a homeowner as it can be used for a variety of purposes in the future. A large number of homeowners avail of it at the time of buying a new home by selling the older one. The more is the equity value, the less he has to pay back; the more cash he gets and can use it up for repurchase. Not only this, homeowners can easily borrow against home equity and use the funds to pay up for essential expenses such as medical treatment, children’s education, and family weddings. In this way, home equity brings peace of mind for homeowners. It is as good as cash even if it is not tangible cash, as you can use it up whenever you need.