How to Build Equity in Your New Home

Friday Jan 17th, 2020

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Equity is the value of your home minus what you owe on your mortgage debt. For example, if your home is worth $500,000 and you still owe $200,000, you have $300,000 in equity. Equity is your financial stake in your home, and since it’s considered an asset, it can be used for a variety of things, from funding renovations to sending the kids to college.

With each mortgage payment, you build up a little more equity in your home. But, you can speed this process up in a number of ways. As well as paying off your mortgage quicker, adding value to your home can also help you build equity. Check out our top 6 tips below.

Put down a large deposit

If you haven’t bought your new home yet, consider putting down a larger down payment. The larger your down payment is, the smaller your mortgage will be, ensuring you own more and owe less. Additionally, by putting down at least 20% as a deposit, you will avoid PMI (private mortgage insurance), and typically qualify for better interest rates.

Lower interest rates mean you pay off more of your principal (the amount owed on the loan without interest) at each payment. The more principal you pay, the more equity you have. Since PMI payments are added to your mortgage payments, they reduce the amount of principal you pay off with each payment. By avoiding PMI, you’re able to pay off more principal each month.

Adjust your mortgage payments

When it comes to your mortgage payments, there are a number of tips and tricks you can employ to build up equity faster. Instead of making 12 monthly payments each year, you can make 26 bi-weekly payments or 13 full payments in a year. By making just one extra full payment each year, you can increase how quickly you build up equity considerably.

You can also opt to pay more on each payment than you are currently paying, especially if interest rates drop. For example, if you have a variable mortgage, you can continue to pay what you were already paying before the interest rate dropped, with the extra going toward the principal.

Refinance your mortgage

Besides adjusting how you pay your mortgage, you might consider refinancing it and opting for a shorter term. Most people take out a 30-year mortgage as standard, but there are other options. You could switch to a 15-year mortgage, which will often offer lower interest rates than a longer-term mortgage. So, while your payments might increase, they won’t double and may only increase slightly, but you’ll be paying more principal and less interest. If a 15-year mortgage is too much, you could also try a 20 or 25-year loan.

Use extra cash wisely

Now and then, you might find that a little extra cash comes your way. From tax rebates and pay rises to inheritance or a lucky lotto ticket, these windfalls could be used to build equity in your home. Most lenders will allow you to make lump-sum payments at least annually, or add extra cash to your regular payments, though it’s worth ensuring that the additional cash will be used to pay down your principal.

However, it’s not wise to put every penny into your home, and it’s important that you have emergency savings put aside. Sometimes, alternative investments might be more worthwhile, so think carefully before putting all your eggs in one basket.

Renovate your home

Besides paying off your mortgage quicker, you can also build equity by making improvements to your home. In doing so, you’ll hopefully increase its value. It doesn’t always have to be expensive either, and some renovations offer a better return on your investment than others. Simply redecorating key areas can add value to your home; think about a fresh coat of paint, new flooring, shelving, etc.

If you’re thinking about a larger remodel, be sure to concentrate on the areas that buyers tend to focus on when house hunting. Kitchens and bathrooms are always a good option, though try to avoid going overboard — it’s typically best to stick to a mid-range remodel in these rooms rather than going high-end. Other areas to think about are entrancesattics, and basements.

Improve your curb appeal

Even if you’re not planning to sell up any time soon, you can always add value to your home by ensuring the curb appeal is up to scratch. A beautiful front yard, a stunning porch, and well-kept paths and driveways are always attractive. And, it’s not just about making your home look great. If your neighbors follow suit, the value of the entire neighborhood can increase, which is great for everyone!

Article originally posted from https://www.point2homes.com/news/tips-tricks/home-buying-tips/how-to-build-equity-in-your-new-home.html

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