Your Home Equity is the value of your home, less the amount of liens against it. If you own a home that is worth $250,000, and you have a mortgage balance of $100,000, your equity in the property is $150,000. Many buyers rely on the equity in their current home to help them buy the next one. The more equity you have, the better the down payment for a trade-up home will be.
Remember that home equity equals security. The more you have, the better off you are, and the more stable you will feel. Here are some ways to build your home equity faster.
Make Larger Payments
Building home equity will come at a price, typically by paying a larger mortgage payment. A frequent trap that you want to avoid is becoming "house-rich and cash-poor". If building home equity means incurring too much debt to live comfortably, then you’ve defeated the purpose of building your equity!
A great option in increasing your home equity is to make additional payments toward your principle. One way assure that you can do this is to ask if your bank or mortgage company offers a bi-weekly mortgage. You would then make two payments per month (1/2 & 1/2 of the total mortgage amount). By paying this way, you will make the equivalent of 13 monthly payments per year instead of 12. That gives you an extra mortgage payment per year. A 30-year loan with a bi-weekly payment plan is usually paid off in about 20 years.
Before you think about making extra principal payments, try using an amortization calculator that you can find online, then to do the math— see how much interest you would save if you made those extra payments, how much it would shorten your loan and how it will increase your home equity.
Refinancing Your Home Mortgage
Another way to you can increase equity faster is to refinance your loan. Recently, most people refinance 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 also equity. The down side to this is that a 15-year mortgage is harder to qualify for than a 30-year, and the payment will be substantially higher.
See if you can manage a shorter loan with the refinance option. For example if you owe more than 25 yrs, try a 15 or 20 year loan. It increases your monthly commitment, but you’ll pay off your loan faster. However, if you can’t afford a higher house payment, your next best way of building equity is to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan's term to match the years that are left on your old loan - if you are five years into a 30-year mortgage, for example, ask for a 25-year loan.
You won't receive the entire amount of your home equity as cash when you sell your home. Most sellers use part of their equity to pay selling costs, such as brokerage commissions and transfer taxes. If you’re thinking about selling your home in the near future, please contact me.