If you are a serious home buyer, you should know how important it is to build your home equity. Having a strong home equity has a variety of benefits, both in the present and in the future.
But if you’re new to the mortgage world, perhaps an eager first-time homebuyer or someone who’s just looking around, you should also have basic knowledge about home equity. This knowledge will come in handy once you’re ready to take the big leap into homeownership.
What is Home Equity?
Home equity is the difference between your property’s market value and the remaining balance on your home loan(s). The more you pay towards your debts, the higher the home equity gets.
So if you pay a 20 percent down payment, you are already building an initial home equity. If you pay a larger down payment, your initial home equity also is bigger.
How Do You Build Home Equity?
As mentioned earlier, paying the down payment is one way of building your home equity.
Every time you pay the monthly mortgage, a part of this payment goes toward the loan’s principal balance. The more you pay towards your principal the higher your home equity becomes.
This is why other people pay a little extra on their mortgage if they earn some extra dollars. Doing so will put more money on your home equity and not on the which the interest rate is applied.
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Although some home improvements may not add to the home’s value, certain home renovations can increase its value. These renovations don’t have to break the bank. If you wish to go this path, plan it out by asking a real estate expert on what home repairs and improvements can increase the value of the property. The higher the value, the bigger the home equity.
This next factor may not be within your control, but a healthy real estate market also contributes to the price appreciation. Equity increases as your home’s value increases.
Last is by choosing a 15-year mortgage instead of one that has a longer term. loans with shorter terms may have bigger monthly payments. However, a huge part of this payment pays off the principal balance. And if you may remember, by lowering your principal balance, you increase your home equity
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How Does Home Equity Come In Handy in the Future?
You can borrow from your equity.
Are you planning to send your child to college but your funds aren’t enough? Are you looking more money to have your house repaired? Or are you thinking of investing but you lack the money to do so?
You can borrow from your home equity by using home equity loans. through this type of loan, your equity serves as your collateral. Most home equity loans have favorable interest rates.
It can be a source of funds during retirement.
A certain type of loan called a reverse mortgage loan allows seniors to tap into their home equity and turn it into readily usable cash.
In a reverse mortgage, you will not be paying monthly dues. Instead, it is the lender who pays you. You can choose from a number of payment methods. It can be through monthly disbursements until you exhaust the maximum loanable amount. You can also opt to withdraw from it as a line of credit. It is also possible to have a combination of the two.
Retirees do not have to pay the loan right away. The loan only becomes due when the retired borrower chooses to leave the house or dies.
These are the two major benefits you can get from building a strong home equity. However, these benefits are just icing on top of the cake. What you have to remember is that building your home equity will eventually lead you to a mortgage debt-free life.
Your goal is to own your home free of debt; to have 100 percent home equity. Whether it be at a normal pace or a slow crawl, work your way to becoming debt free. But, hey, who doesn’t want to be mortgage-free sooner?
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