A home is more than just the backdrop to many memories; it is also an investment and wealth builder through what is called equity. Home equity is the market value of your home. You can calculate this by taking the difference between the value of your home and the amount of money you owe on your mortgage.
So, let’s say the value of your home is $400,000 and you owe $300,000 on your mortgage. Your home’s equity would then be $100,000.
As you build equity, you are increasing the difference between the value of your home and the amount of money you owe on your mortgage.
Why Building Equity is Important
Having equity increases the amount of money you have invested in your house. You can use this money now or in the future, depending on your financial goals. If you need money now, you can borrow against your equity as a loan. Axia does offer both Home Equity Loans and Home Equity Lines of Credit (HELOC) solutions.
When you sell your home, the proceeds of the sale first go to paying off the remainder of your mortgage. The more equity you have, the more money you will get from the home sale and can use towards the down payment of your new home.
How to Build Home Equity
Here are some ideas on how you can build equity. Please note that some will provide a little bit of equity quickly, while others will take some time and money.
Make a big down payment. This is one way to gain equity instantly. The more money you can put down towards the purchase of your home, the less money you would need to borrow.
Pay Your Mortgage Down. The more money you can put towards your mortgage payments, the more equity you will build. If you make extra payments to your mortgage, you will save money on the total interest paid over the life of the loan (for example, one extra payment a year can pay a 30-year loan off in 18 years. It is often advantageous to use any tax return in April for this purpose).
Switch to biweekly mortgage payments. Instead of paying your mortgage once per month, you can schedule to pay half of the monthly payment every 2 weeks. How does this help build equity? Because you will pay an extra mortgage payment every year. How? Well, there are 52 weeks in a year, and you are paying every other week. Since those payments are half-payments, you will be making 13 full mortgage payments in a year instead of 12.
Refinance to a Shorter Loan Term. Once your mortgage is paid off, you will have 100% equity in your home. One way to get across the finish line faster is to refinance to a shorter loan term (usually 15 years). You will also save money on the interest you would have paid. Keep in mind that when you do shorten the loan term, your monthly payments will go up now that you have less time to pay off the loan balance.
Make Home Improvements. Making regular updates to your home can increase its value. Both bathroom and kitchen upgrades or remodels do cost money upfront but will pay for themselves with the equity you build over time.
One thing to consider is that the equity of your home will fluctuate depending on the real estate market of where you live. Several online tools can give you an estimate of what your home is worth in today’s market. If you aren’t sure what your home is valued at currently, be sure to contact an Axia Mortgage Specialist.
Equal Housing Opportunity. Axia Home Loans is a registered tradename of Axia Financial, LLC. NMLS 27830.