How to increase the equity in your home

Establishing the equity in your home can take time, but more equity you have, the more money you can borrow to meet major expenses. Owners tap into the equity in their home when they need funds for life events such as paying school fees, home renovations Where to pay off high-interest consumer debt like credit card debt.

Mortgage lenders prefer that you have at least 15-20% of the equity in your home before they let you borrow. For the average homeowner, it can take around five to 10 years to build up that amount of capital.

Read on to learn more about how you can start building your home equity now.

What is home equity?

The equity in your home is simply the difference between what you still owe on your mortgage and the current market value of your home.

The way you calculate home equity is simple: subtract the remaining balance of your mortgage from the market value of your home. If, for example, you took out a mortgage for $450,000 and you still have $200,000 to pay off, you have $250,000 of equity. Building up 15-20% equity can take up to 10 years for a typical owner with a 30 year mortgage.

5 ways to increase the equity in your home

The way to increase the equity in your home is to make regular mortgage payments over the years. The longer you pay off your mortgage, the more equity you will have in your home.

1. Pay a deposit

Manufacturing a big down payment is one of the easiest and fastest ways to increase the equity in your home. The more you invest when you buy the house, the more equity you have from the start. Additionally, if you make a down payment of 20% or more, you can eliminate the requirement for private mortgage insuranceor PMI, which can add hundreds of dollars to your monthly mortgage payment.

2. Focus on paying off your mortgage

You can always make an extra mortgage payment or two if your budget allow. Making 13 or 14 mortgage payments a year instead of just 12 will reduce the amount of interest you pay over the life of your loan, as well as the time it takes you to pay off the loan. If, for example, you receive a tax return this year, consider putting that amount of money in your mortgage instead of saving or investing — if you can afford it.

3. Pay more than the minimum

Just like with credit card, you’ll pay off your debt faster if you pay more than the minimum payment due each month. The same is true for mortgages. If you can pay $100 or $200 more for your home loan each month, you will reduce the amount of interest you pay over time on your mortgage. Also, as with most mortgages, when you make a payment, only part of it is used to pay off the principal balance of your loan – your payment is also used to pay off interest or things like PMI . Take the time to understand the terms of your mortgage and how your money will be used to repay your loan to your lender.

4. Stay in your home for at least five years

For most owners, it takes about 5-10 years to build up 15-20% of home equity. So if you’re planning to move before five years, it may not make sense to try to tap into your home’s equity, as you may not have established enough of it yet. Home values ​​also tend to increase over time, so if you don’t stay for at least five years, you can’t take advantage of your home’s appreciation in value, which naturally gives you more equity. in your property.

5. Renovate and beautify

Home renovations are a great way to use the equity in your home because you increase the value of your home while profiting from your investment. Additionally, there are tax advantages if you access the equity in your home using certain types of home equity loans. For example, if you use home equity line of creditor HELOC, to complete any home renovations, interest on your loan is tax deductible.

The bottom line

Building equity in your home is important because it gives you access to cash, often at low interest rates. Home equity loans are a reliable way to access funds without having to sell your home or use higher interest financing options like personal loans. As long as you have at least 15% to 20% of equity built up in your home, most mortgage lenders will allow you to borrow up to 85% of your home’s value – assuming you complete the rest their requirements for certain aspects of your financial situation. a life like your credit score and your income.

Remember that when you borrow against the equity in your home, it is a secured loan: you are use your home as collateral to guarantee your equity loan. This means your bank or lender can repossess your home if you fail to make your payments. Make sure you can comfortably afford the monthly payment that comes with a home equity loan (often called a second mortgage) in addition to your first mortgage payment.

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