How To Build Home Equity

Building equity is beneficial for every homeowner. Your home is a big asset, and it represents a large portion of your financial future – it can be used to finance a child’s university fees or to supplement retirement savings. In this blog, we will take a look at how to build home equity. 

Understanding equity

When considering the value of your home, its equity is the part that belongs to you. As time passes, your home equity will increase once you pay off more of your mortgage or your house gains value. Here’s an example:

You have a home that is worth $600,000 and a mortgage balance of $450,000. This means your home equity currently stands at $150,000 as this is the amount you’ve paid for.

However, if you’re wondering how you can go about building equity, check out these three easy ways to get started.

Make a large deposit

Because your home equity represents how much of your house you actually own, making a large deposit (or down payment) is the best way to build up as much equity as possible in the shortest amount of time. Industry standards usually suggest putting down at least 20%, so putting down even just 21% can increase your equity much quicker.

Paying off your mortgage

You can build equity by simply making your monthly mortgage payments. If you bought a house for $400,000 and made a 20% down payment, you have 20% equity ($80,000) in your home. As you pay off your mortgage by small amounts each month, your equity rises. If you want to find out how much your home equity is rising by, ask your lender how much of your mortgage payments are going to the principal and how much are going to interest. The former will help you build up equity.

If you’re wondering how much your property is valued at, contact us and we will be able to organise an approximate valuation for you.

Another option you have is to pay more than what your lender expects of you. For example, instead of making monthly mortgage repayments of $800, you could up this to $1200. However, make sure any overpayment is going towards paying down the principal.

Refinance to a shorter loan

Refinancing offers you another opportunity to build equity. By refinancing a 25-year mortgage to a 15-year mortgage, you’ll pay it off in nearly half the time. However, keep in mind that to qualify for a refinance mortgage you’ll need a certain amount of equity already, a low debt-to-income ratio and good credit.

It’s also a good idea to avoid cash-out refinance options. You could end up with a bigger mortgage than you originally started with, and it’s counterproductive if you’re looking to build your equity. This is because you’ll get cash in exchange for the home equity you already have.

For more advice, or to talk to a member of our team about equity access loans, contact Pearl Financial today.

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Author: Shane