There are many benefits to buying and owning your own home. But perhaps one of the most appealing is the ability to build home equity.
Home equity is the difference between the house’s current market value and the amount you owe on it. It’s the part that is yours — free and clear.
There are many ways to build equity in your home, including:
- A natural increase in your home’s value. If you’re one of the lucky ones who buys their home at the right time, you’ll see your home’s value increase. As the value increases, the gain is yours. If you buy your home for $300,000 and it’s worth $325,000 a year later, that’s $25,000 in equity you have in your home.
- Making a large down payment. If you start right off the bat with a healthy down payment, you’re putting the money into your home instead of having it available to spend on something else. With more money into the home, you’re starting with equity.
- Paying your mortgage. By simply paying your mortgage each month, you’re gradually paying against the principal on your home (as well as the interest). If you pay a little extra each month, it automatically goes toward your principal, so you’re putting that extra money into the house and building equity.
- Shortening your mortgage term. If you’re refinancing, you can opt for a shorter mortgage term and you’ll start building equity faster. For example, if you switch from a 30-year fixed rate to a 15-year fixed rate, your monthly payments will go up and the equity will mount much more quickly.
- Avoid refinancing. If you’re refinancing from a 30-year fixed rate to a new 30-year fixed rate in order to pull cash out, you’re essentially starting over. You’re back to zero equity and, depending on the housing market and how quickly home values are rising (or falling), it can take years to build equity.
- Making home improvements. If you make the right home improvements, you can increase the value of your home and therefore build equity. The key, however, is to know which upgrades and improvements will give you the most bang for your buck. Typically, kitchen remodels are a sure thing. Buyers will pay more for state-of-the-art appliances, granite counter tops, islands, updated cabinets and flooring. Although you put money into the project, you’re increasing the value of your house, ultimately building your equity.
The first step to building equity in a home is getting a mortgage loan and buying a home. The best way to get the ball rolling is to get prequalified for a loan so you’re in a strong position to make an offer and you know how much your lender will loan.
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