Build Home Equity Faster
Equity is the part of your property that you actually own. If you own property that’s worth $250,000, and you have a mortgage with a remaining loan balance of $100,000, your equity in the property is $150,000. Repeat home buyers usually rely to some extent on the equity in their current home to help buy their next home. The more equity you have, the larger the possible down payment for the trade-up home.
Home equity also equals security. Especially at the beginning of a mortgage loan, so little of your payment goes toward the principal that equity builds maddeningly slowly. Consider making a larger down payment if you can afford to do so.
Naturally, building home equity comes at a price, usually in the form of larger payments. If building home equity means incurring debt to make ends meet, then you’ve defeated the purpose of building equity in the first place.
4 Ways to Build Equity
One way is to make additional principal payments. Additional principal payments make sense when you save more on your mortgage interest expense on an after-tax basis than you would earn on your investments on an after-tax basis. If you are able to deduct your mortgage interest from your income taxes and your marginal federal income tax rate is 27 percent or higher, then your after-tax cost of mortgage debt is between 3 and 4 percent.
For instance, if you earn 4 percent pretax on a five-year CD, and you're in the 27-percent bracket for federal income taxes, the after-tax return is less than 3 percent.
Before you start making additional principal payments, use one of the many amortization calculators you can find on the internet to do the math—how much interest you would save if you made additional principal payments, and how much it would shorten your loan and increase your home equity.
The other way to build home equity faster is to refinance. Recently, the reason most people have refinanced is to lock in a lower interest rate and/or lower their monthly payment. But you can also refinance to shorten the term of your mortgage, which builds equity. If you consider a refinance be sure to look at your budget, if you can try making an extra payment either bi-weekly or as the budget allows.
If you had a $200,000 30-year ARM at 8.13 percent and replaced it with a 15-year fixed rate loan at 6.75 percent, your monthly payment would go from $1485.69 to $1769.82.
Home improvements can add more value to a property than you might realize, and you don’t have to empty your bank account. Talk with a local Real Estate agent to discuss what home improvements might get you the most when you choose to sell your home.
Curb Appeal / Staging
Make your home look good when you list it and there’s a better chance it’ll sell, and sell for more. Simple things can make a big difference, such as new paint, carpet, bright lighting, cleanliness, plants, flowers, etc.
There are many ways to build home equity take charge of what you can control for a better financial future. Be sure to call us with any questions in regards to building home equity,