Each payment you make towards your mortgage as a homeowner goes into building your home equity, making it a powerful financial asset that is just waiting for you to tap at the right time. As you make more payments, your home equity grows, same as it grows when property values increase in your area. But what does it mean to build equity in your home? What are the benefits of building home equity? What good can this do for your finances?
What is Home Equity?
Your home equity is the value or the portion of your home that you own. It is calculated by subtracting your mortgage debt from the current market value of your property. For example, if your home is currently worth $1,000,000 and you still owe $290,000, then your home equity is $710,000. This value is what you own and can access via a home equity loan if you choose to tap your home equity.
What Are Ways to Build Home Equity?
The main ways to build home equity are to decrease your mortgage debt or to increase your property’s value. You can achieve these by the following:
- Starting with A Big Downpayment
What you pay as a downpayment will instantly boost your home equity. Yes, there are ways to own a home with as little as 0% to 3% downpayment but if you plan to access your home equity soon, starting with a downpayment of around 20-30% can help you achieve that.
- Pay More of Your Mortgage
Although mortgage payments typically come with a schedule, there is nothing wrong with paying more when you can afford it. Just paying off an extra month every few months can make a huge difference because you will keep decreasing the amount that you still owe. You can also opt to pay on a bi-weekly basis instead of monthly. This way, payments will be more budget-friendly while making it easier for you to pay off more of your mortgage faster.
- Increase the Property Value
Your home is an investment in itself. Anything you do to improve the property will increase the home’s market value and build home equity. It may not be possible to get the same exact returns as what you invest but living in an improved home can also improve your life and work performance, therefore helping you achieve more and thus, still gain wealth overall. If the value of possible returns is a big concern, it is best to consult with a real estate professional to determine which home improvement projects can increase home value the most and go from there.
- Refinance Your Mortgage to A Shorter Term
Making your loan term shorter means that you pay more per period. It also means that more of your payments go towards the principal every pay period.
Use Your Home Equity
Once you’ve built your home equity, you can choose how you want to use it and access it. One good way is to get a home equity loan. With a home equity loan, you can use your home equity without having to sell your home. Contact us at Homebase Mortgages when you are ready to use your home equity!