How to Build Home Equity

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. 

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. 

To conclude

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.