Home equity is defined as the difference between the value of the property and the remaining balance on the mortgage. To build equity in your home, you need to increase its market value or reduce your mortgage’s balance. While the first requirement often involves major renovations, repairs, or upgrades (e.g. energy-efficient improvements, kitchen remodels, etc.), the second one revolves around specific financial aspects. Here are three simple steps any homeowner can take to build home equity.
- Accelerate the mortgage amortization schedule – According to mortgage amortization schedules, the majority of a monthly mortgage payment goes toward paying interest in the first few years. As the home loan matures, larger portions of payments are devoted to the principal. Since the interest is calculated as a percentage of the remaining balance on the home loan, making additional principal payments every month will help reduce the total amount owed to the lender, shorten the life of the loan, and build equity faster. By paying an additional $100 per month on a 30-year $100,000 mortgage, for instance, a borrower can pay off the loan sooner (in just 258 months instead of 360 months) and save approximately $26,000. Though paying down your mortgage is one of the easiest ways to build equity in your home quicker, it makes financial sense only if your loan agreement doesn’t include a prepayment penalty clause.
Another thing a home buyer can do to build equity faster is to add more money to the down payment. A larger down payment will lower the loan-to-value ratio, which means less interest paid to the lender. This will allow the borrower to pay off his mortgage and own his home in full much faster.
- Consider home appreciation. The real estate market can be responsible for significant changes in home equity. If you’re a first time home buyer, try to find a home in a good neighborhood with future development plans. While a booming area will stimulate the market value of real estate, allowing you to build greater equity in your home, specific factors such as noise pollution, bad neighbors, poorly maintained homes and gardens, schools with a bad reputation, and foreclosures, can bring down home value and negatively impact equity.
- Build equity by refinancing. Many homeowners build equity by refinancing their mortgages. If a homeowner refinances from a 30-year to a 15-year fixed mortgage, with a lower interest rate, he will pay his home loan sooner, save money in interest, and gain home ownership and equity faster than if he didn’t refinance. Unfortunately, refinancing to a shorter term home loan typically increases the size of the monthly payment – an expense that many homeowners cannot afford.
As a homeowner, it’s important to know that there are a few more ways to build equity. Even if you’ve already made a decision, it can’t hurt to explore other alternatives. Get in touch with our experienced mortgage originators at North Florida Mortgage by calling (904) 389-4635 or using our online form, and they’ll give you all the information you need to figure out the best way to build equity in your home.