For most people, the equity buildup in a home is the largest asset they have, so there is a huge incentive to increase their home equity to improve their finances.
Home equity is your interest in a home, which can increase over time if the property’s value increases or if you pay down the mortgage loan balance.
In a sense, it’s the portion of the property you truly own that’s 100% yours. If you took out a mortgage to purchase a home, the lender has interest in the property until you can pay it off in full, even if legally you are considered the homeowner. Keep reading to understand how home equity works and what you can start doing right now to build it!
How Does Home Equity Work?
Let’s say you bought a home for $400,000 and made a 20% downpayment. You also took out a loan for the rest of $392,000. Given this scenario, your home equity is the 20% you paid for it out of your own pocket. So, even if you are the homeowner, you technically only bought 20% of it so far.
The lender does not own any portion of the house unless you have a shared equity mortgage, but that doesn’t happen in most cases. For most, the house is used as collateral for the loan, and the lender secures its interest by getting a lien on the property. The more money you pay back, the more of your home you own.
If the housing market is doing well and your home increases in value, your home equity increases, even if the loan amount stays the same. For instance, say the home is now worth $500,000. You still have to pay back $392,000, but now your home equity increased to 21.6% just because of the market change.
How to Start Building Home Equity
For most people, the equity buildup in a home is the largest asset they have, so there is a huge incentive to increase their home equity to improve their finances. Here are some of the top ways you can do that:
- Make a large down payment – the more money you can afford to put into the downpayment, the more home equity you start with
- Pay more on your mortgage – this can help shorten your loan term and help you steadily build equity.
- Increase your home’s value – the value of the property is not only contingent on the market. Putting it into shape can also increase its value quite often, such as adding rooms or remodeling.
- Watch the market trends – if you’re interested in building equity for a particular purpose (such as selling), you should also watch the real estate market closely to see when its value may increase.
Are you looking for a loan to buy a dream house? The Better Rate mortgage team is happy to be of service. Get in touch with us now to find out more.