How do you build equity in your home?
If you're a homeowner with a mortgage, building equity in your home is the path to paying off your mortgage and fully owning your home. In addition to making your monthly mortgage payments, there are other ways to build equity faster and more efficiently.
Read on to learn more about how to build equity in a home.
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Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all your banking needs.
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What is equity and how does it work?
Home equity is the amount of your home that you own, that is not encumbered by a first or second mortgage loan. For example, if you do not have a mortgage, then you have 100% equity. If you have a mortgage, the lender "owns" part of your home. As you pay off your mortgage loan your equity (ownership) increases. There are strategies for building equity in a home, which we will discuss in this article.
Tips for building equity fast
Building equity in a home includes reducing the amount you owe and increasing the amount you own. Home equity can also increase if the market value of your property increases. Here are some tips on how to build equity in a home:
Make a large down payment. The larger the down payment you can make, the lower the mortgage loan amount you'll need to borrow.
Pay closing costs out of pocket.
Closing costs are the mortgage-related fees that homebuyers pay at closing, which may include property tax, homeowners insurance, attorney and mortgage broker fees, document recording fees, etc. If these costs are included in the mortgage amount, you will pay interest on the fees. Paying closing costs out of pocket reduces the overall mortgage loan amount.
Shop for the best rate possible. The lower the mortgage interest rate, the lower the monthly payment will be on your loan. Paying less interest means you'll have more money to pay down the principal loan balance, so always shop for the lowest interest rate.
Avoid private mortgage insurance. Borrowers who make a down payment of less than 20% will typically be required by the lender to pay
Private Mortgage Insurance (PMI) on a conventional loan (e.g., a loan that is not an FHA, VA or USDA loan). Lenders charge PMI to protect themselves in cases where the homeowner fails to repay the mortgage.
Make biweekly payments. Lenders typically allow mortgage payments to be made once a monthly or bi-weekly. Splitting your payments this way results in 13 payments per year, instead of 12.
Increase monthly payments. Paying a little more each month toward the principal amount of the loan (not just the interest) decreases the mortgage balance.
Refinance to a shorter loan term. If you have ample monthly income to handle a larger payment, and you can get a lower interest rate than you have now, refinancing to a shorter-term loan (such as a 15-year mortgage) will give you a home equity boost. Your monthly mortgage payments will increase but you'll pay down the principal mortgage balance sooner.
Make home improvements/renovations. Making home improvements that increase your property value helps build equity. Projects that are particularly valuable include replacing the roof, windows, and doors for energy efficiency.
Wait for your home value to increase. The
loan-to-value ratio (LTV) on a mortgage loan compares the amount of the loan to the value of the property. As your home value rises, your LTV ratio will decrease, and therefore, your home equity will increase.
Avoid a cash-out refinance. If your goal is to build equity, it's not a good time to add to your mortgage debt. This means not taking out a home equity loan, a home equity line of credit, or doing a
cash-out refinance. Getting cash-out will add to your debt burden and reduce home equity.
Why is home equity important?
There are several advantages to building home equity:
- Potential to make a profit when selling. The less you owe on a mortgage the more you'll earn in the sale of your home.
- Can use equity for almost anything. Getting a home equity loan or home equity line of credit gives you cash for other uses, like making home improvements and paying down high-interest debt or medical bills.
- You can build long-term wealth. Some homeowners use a home equity loan or HELOC to purchase a second home or investment property, which can build wealth if the property value increases.
How long does it take to build home equity?
The time it takes to build equity in a home depends on your current mortgage loan amount and how much extra money you put toward paying down your loan amount. Economic factors, such as your home's market value also affect equity.
How to calculate home equity
Home equity is the amount of the home you own. If you have a mortgage, you can
calculate your equity by subtracting the mortgage amount from the appraised or market value amount.
Home equity calculation example:
Your home's appraised value $600,000 – (minus) the amount owed on the mortgage $250,000 = $350,000 equity.
Divide the equity ($350,000) by the home value ($600,000), which is 58% equity. Most lenders require 15-20% equity.
How do I pull equity out of my home?
If paying off your mortgage is not a priority, you can take advantage of your equity in several ways.
Home equity loan.
Home equity loans come with a fixed interest rate. Unlike a HELOC, a home equity loan is given in a lump sum payment and interest is charged on the full amount you borrow, whether you use it or not. The cash can be used to make home improvements, pay for college, a wedding, business expenses, and pay off high interest debt.
Home equity line of credit (HELOC). A
HELOC provides a line of credit, much like a credit card, so you can borrow as much as you’d like (up to the limit of your line of credit) and only pay interest on the borrowed amount. Most HELOCs have a variable interest rate. As with a home equity loan, the cash is yours to use any way you want.
Cash-out refinance.
Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing. As with a HELOC and home equity loan, the cash is yours to use any way you want.
Is using home equity worth it?
Whether you choose a home equity loan or a HELOC, it's important to run the numbers and be sure the loan meets your financial needs and goals. Home equity loans are a type of second mortgage that will be secured by the equity in your home. Failure to repay the loan can result in the lender foreclosing on your home. That said, if you need cash to pay down high interest debt or use the money to make home improvements, using home equity can be worth it.
Why Savvy Consumers Choose CU SoCal
For over 60 years, CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Get Started on Your Home Equity Line of Credit Today!