Owning a home is much more than having a shelter. It’s a roof over your head, a haven, and a place to raise your family. A home is also an investment vehicle and a forced savings account. Hence, a homeowner can build a tangible home equity asset by paying the monthly mortgage.
Home equity is the amount of your home you own that’s clear from your remaining mortgage balance. And over time, your home’s equity value will grow, allowing you to create wealth. Therefore, increasing your home’s equity is an excellent way to expand your financial standing.
In a financial emergency, you might be able to turn the value of your home into cash. Or, if you ever find yourself short of funds for college tuition fees, home remodeling, or any other financial needs, you can easily tap into your home’s equity.
What is Equity?
By explaining how equity works, you’ll understand more about it. So, what is equity? Home equity is the total value of your home minus your home loan. The best way for homeowners to increase the equity in their homes is to continue to pay down their loans. In short, when you increase your property’s value, your equity also grows.
There are several ways you can increase the equity of your residential property. It involves looking for ways to boost your property’s value, lower the mortgage debt, or combine both. Here are some options for you.
1. Refinance To A Shorter Loan Term
The earlier you pay off your mortgage, the sooner you can have 100% equity. This is particularly true if you’re not using your property as collateral. If you decide to refinance your mortgage to a short-term loan, you’ll likely pay off your loan earlier.
A shorter loan term comes with its own set of benefits. One of the main advantages is that you’ll get a lower interest rate. The second advantage is that more of your monthly mortgage payment will go toward the principal amount.
For example, if you’re currently on a 30-year mortgage plan, you can refinance your loan to a shorter term. Choosing a 15-year mortgage can help you build more equity every month than you would with your current mortgage scheme. So, if you want to increase your home’s equity quickly, consider refinancing your mortgage into a shorter-term loan.
However, there’s a catch. Monthly payments are generally higher on short-term loans. With that in mind, it’s best to ensure that your budget can accommodate the extra mortgage before considering refinancing.
2. Boost The Property Value
Making some improvements to your residential property can increase its value and, consequently, its equity. However, keep in mind that you may not recoup the funds you put into the project.
According to Cost Vs. Value report in the 2022 Remodeling magazine, an average upmarket bathroom remodel gives a 53.5% return on investment (ROI), while a kitchen remodeling with midrange finishes gives a 71.2% ROI. Still, a garage door replacement project with a 93.3% ROI is considered the best.
Before you launch any renovations, it would be wise to do research first. A real estate agent or a home professional can help you identify renovations that offer the most return. The idea is to stop putting money on renovations that give little to no improvement to your property’s value.
3. Wait For Your Residential Property Value To Increase
Residential property is one of those assets that appreciate over time. Since land is limited, it tends to increase in value, just as the property that sits on it. Factors like the need for land, local market value, demand and supply of housing, and commercial development affect your property’s appreciation value.
The value of your property could rise or fall depending on any of these factors. For example, if local housing prices rise and demand grows, your property’s value also increases. However, your property’s value could also drop because of them. And when it happens, you may lose some equity.
Significantly, borrowing too much against your home’s equity can leave you vulnerable to a downward shift in the market. During these times, it’s best to wait it out since home values usually bounce back.
4. Make A Big Deposit
Your first deposit kickstarts the equity you create over time. You can deposit as little as 3% when closing a deal on a home. However, this will depend on your mortgage options. Generally speaking, a sizeable down payment improves equity in your residential property. Indeed, it’s one of the speediest ways to lower your property debt and acquire greater home equity.
In addition, you may escape paying private mortgage insurance every month if you can deposit at least 20% when buying a home. But before you think about how much you want to deposit on the property, it’s wise to consider how much remaining funds you’ll have.
Leaving yourself with little to no money will make it challenging to handle any financial emergencies that may arise. Also, you may encounter issues covering the monthly fees. Moreover, another factor is your home’s maintenance costs. You should know that in the first year of the home’s purchase, these costs usually account for about 1% of the property’s value.
Equity isn’t built overnight, but it’s worth the time. To increase your equity, you must increase the difference between your home’s value and what you owe. If you want to grow equity in your residential property, you must look for ways to reduce what you owe or increase your equity.
Making a big deposit, increasing your property’s value, waiting for your home’s value to rise, and refinancing to a shorter-term loan are some of the few ways you can grow your equity. And with a significant equity value, you can access many financial benefits.