4 Easy Ways to Build Home Equity
There are countless benefits to owning a home, but arguably, one of the most beneficial reasons is the ability to build equity. To put it simply, home equity is the current market value of your home, minus what you still owe. As a homeowner, you should consistently be working toward getting a positive number out of this equation.
There’s no guarantee your property will stay at or increase its value. However, if you take care of it, you have the opportunity to build equity. In short, gains will come from paying down the principal balance on your loan or the market increasing in your favor over time.
1. Shop Smart
The housing market can be highly unpredictable— just look at 2020. Nonetheless, research shows that homes are more likely to increase value over time, with little action on your part, when they’re located in attractive neighborhoods or growing towns. Now, this isn’t to say you can’t build equity in the rural cities or upcoming regions, but statistics favor homeowners in developing areas.
TIP: If you’re wondering how to pick the right neighborhood for you, we recommend meeting with a real estate agent to discuss your “must-have” list and doing research to narrow down your options.
2. Save for a Large Down Payment
It’s a mortgage myth that borrowers must put down at least 20 percent when purchasing a house. However, buyers that do put down more upfront can save themselves money in the long run.
Mortgage Insurance (MI) is a policy that lowers the risk of giving a loan to applicants who are putting down less than 20 percent of the purchase price. Mortgage insurance is required on conventional loans with a down payment of less than 20 percent and is also typically required on FHA and USDA* loans. Homeowners with MI can expect to pay an average of 0.5 – 1.5 percent of the loan amount per year.
Unlike FHA and USDA* loans, which almost always require MI for the life of the loan, on a conventional loan, the MI comes off if you are paying it monthly. Mortgage insurance will automatically cancel when your loan balance reaches 78% of the original value of your home. For this purpose, “original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower. You can also request to remove the mortgage insurance before then. Learn more here.
3. Make Beneficial Renovations
Not all renovations should be prioritized equally, especially if you’re interested in building home equity sooner rather than later. Before you whip out the sledgehammers and start painting every wall in sight, do your homework! What renovations work with your budget and lifestyle? Can you make these changes on your own, or will you need to hire a professional? Will your renovations match the style of your neighborhood? There are plenty of questions to ask before renovating your space, but here are a few projects we recommend.
Garage Door Replacement
We know what you’re thinking. Really? Why should I replace my garage door? According to Bank Rate, replacing an outdated 16-by-7-foot garage door with a four-section door increases curb appeal without breaking the bank. With close to a 95% cost recoup, this project is worth every cent you spend. Need inspiration? See a few ideas on our Pinterest.
- Average Cost: $3,695
- Average Resale: $3,491
- Cost Recouped: 94.5%
On average, the cost to replace the siding of a 1,250 square home will cost about $17,000, with an average recoup of nearly 78%. This may seem like a costly change to only see a third of your investment returned in the value of the home, but this aesthetic improvement could help your home sell faster if you decided to sell.
- Average Cost: $17,008
- Average Resale Value: $13,195
- Cost Recouped: 77.6%
Creating a lovely patio space can range from building a wooden deck or hiring someone to power wash the surfaces. If you need additional services outside of just the patio area, such as extensive landscaping or pool repair, this should be taken into consideration. At an average of $56,000 in costs with only a 55% return on your investment, this could be the costliest home renovation you do.
- Average Cost: $56,906
- Average Resale Value: $31,430
- Cost Recouped: 55.2%
4. Pay More than the Requirement
No one wants to hold on to debt for their entire lives, but in some cases, having a mortgage makes the most financial sense for the time being. The good news is, there are ways to pay off your mortgage early without causing additional financial stress.
Refinance Toward a Shorter-Term Loan
If you currently have a 30-year loan, consider refinancing into a 10 or 15-year loan. Your payments will obviously be higher, but with current low rates, you may end up paying less in the long run.
Pay a Little Extra Each Month
Are you looking to make small changes over a long period? Then paying a little more each month could work for you. Consider how much time you could cut off your loan over time if you skipped the extra cup of coffee or took a sack lunch instead of going out. Every little bit counts!
Make Lump Sum Payments
Are you looking forward to a big quarterly bonus, or maybe a little extra cash in your pocket at the end of the year? Put that toward your mortgage! But don’t forget that any additional funds you put toward your mortgage should be applied toward your principal balance rather than the just the following payment due.
Building home equity is a great way to build long-term financial success. Are you ready to invest in your future? We can help.
Connect with us today for a complimentary consultation!