Build Your Equity
When you buy a home, you will likely be thinking about how to build equity. Using equity from a home can help individual families expand horizons in a number of ways. You may wish to renovate your kitchen, wipe out credit card debt, or send the kids to college.
Understanding equity, and how it can be used, plays a major role in owning a home. The equity you build in your home is a valuable asset, so knowing the basics is homeowner 101.
The worth of your home and how much you owe on your mortgage are the two factors that dictate equity. Let’s say your home is worth $250,000 and you still owe $200,000 on the mortgage. This means you own $50,000 in equity on the property. With that in mind, there are two methods in which equity can increase.
As you make payments on your mortgage, equity in the property will continue to increase, so long as the value of your home does not decrease by an amount which cancels out any equity. Similarly, if your home increases in value while you are making regular mortgage payments, the equity you have in the property also increases.
In the example from earlier, you have a home worth $250,000 at the point of purchase. If you are then able to make a down payment of 20%, that gives you your $50,000 in equity. The mortgage from the lender accounts for the other $200,000. Equity then builds as you make mortgage payments, or as the home value increases.
At any given time, you cannot base current equity on mortgage payments deducted from the value of your home. A real estate appraiser can provide accurate appraisal of your home’s current worth. If you simply want an estimate of the equity you have in a property, comparing sales of similar homes in the area is an option.
Building Equity in Your Home
If you wish to build equity quickly, the obvious solution is to place a large down payment on the property. The amount you put down is instant equity. Your $250,000 home with a down payment of 20% equals $50,000 in equity and you will owe less on the mortgage than you would with a lower down payment amount.
Paying off your mortgage efficiently and quickly is another way to build equity in a home. Every month, you pay what is known as the principle balance on your mortgage loan. In addition to paying off the principle, there are property taxes and insurance to cover. New homeowners pay a lower amount of principle and a higher amount in interest. As the years roll by, the balance will begin to shift, and you will start seeing more of your monthly payment contributing towards the principle balance.
However, not all mortgage loans work in the same way. An interest-only mortgage does not allow homeowners to build equity or decrease the principle. As the name suggests, these types of mortgage loans allocate the entire payment to interest and other charges, such as insurance.
Paying more off a mortgage each month, or when you have extra cash, is another way homeowners can drive down principle balance. This method allows you to whittle down what you owe, if and when, you can afford it. All the while you are building equity in your home and investing for the future.
The longer you stay in a property, the more likely it is you will see a sizeable increase in home value. Depending on the housing market, if you stay in a property for over five years, there is a greater chance the value will increase. In most cases, anything fewer than five years will not allow enough time for a considerable shift in home values.
Don’t leave your home to stagnate while you are paying off the mortgage. When opportunities for renovations or value increasing improvements arise, take full advantage. Adding extensions, remodeling old kitchens, and improving energy efficiency are just some ways you can increase equity.
Galaxy Lending Group Guidance
Of course, you need to start with a mortgage that is designed to suit your finances and needs. Galaxy Lending Group can provide expert guidance and advice to steer you on the right course. The type of mortgage you take out will have a direct impact on how quickly and effectively you can build equity in a home. We provide advice tailored to the individual or family, with a focus on answering all the equity related questions you may have.
To learn more about how Galaxy Lending Group can help you build equity in your home, reach out to our team of financial specialists. We have offices in Arizona, Oregon, Washington, and Texas for your convenience.