Home equity enables a homeowner to use their home as collateral to access more credit; in simple terms, it is referred to as a second mortgage. Borrowers often rush into home equity loans because they feel that these are relatively safe, which they certainly can be if you are careful and do your research before settling on one. Having equity is very important for you saving money in the long run and keeping your home marketable at a potentially higher value than what you paid. Read on to learn about its advantages as well as the ways you can gain home equity.
Advantages of Home Equity
- Lower interest rates. In case the interest rate for your original mortgage is higher than the prevailing rate, or if it has a persistently increasing adjustable rate, then a lower interest rate will lower your monthly costs while increasing your home equity. If the interest rates have decreased and you took a fixed rate mortgage earlier on, you can opt to refinance for an adjustable rate mortgage.
- Higher borrowing capacity. A second mortgage will enable you to borrow more money, thus bringing your indebtedness in the home to around 125 percent or even more than the set value. If the home equity loan rates are volatile then you can opt for fixed interest rates even though they will be slightly higher.
- No interest charge until cash is utilized. If you haven’t used the extra cash then you will not be charged any interest. This cash is a great financial tool which you can decide to use for home improvement or for other needs. If the money is needed immediately, only a small penalty will be applied.
Ways to Gain Home Equity
Home equity enables the homeowner to qualify for a higher loan amount, enjoy tax deductions and easily qualify for another loan even with a bad credit rating. The extra money obtained can be used to help pay for a child’s college education, consolidate other debts or remodel one’s current home. To enjoy these and other privileges, here are some tips and tricks you can apply to obtain home equity:
- Reduce the balance on your mortgage. As you consistently pay down all of your mortgage balance, you are clearing a portion of both the interest and the principal. These payments must be made on time. As you keep reducing the mortgage balance on your home, the equity value continues to rise.
- Increased home price. Watch for changes to your home’s value based on market factors. For example, if it costs $200,000 and the price increases to $270,000 after five years, then your home equity will have increased by $70,000. On the other hand, this price may also come down any time. Unfortunately you have little to no power over the market’s influence on home values.
- Maintain your home well. Taking good care of your home and keeping it updated is paramount to increasing the value of your home and gaining more home equity.
- Shorten the mortgage term. If you refinance the mortgage so that you pay the balance on your home for a shorter term, say 15 years instead of the original 30 years, then you will clear the loan balance after a short while. This will mean that after a few years, you will have doubled the equity on your home compared to the initial mortgage repayment plan.
- Pay a larger down payment. Before you take out a mortgage loan initially, you can commit a lot of money to the down payment so that you have a lower mortgage balance. For you to obtain more equity on your home, it essentially means that you have to have a lower-to-value ratio on your loan.
- Keep up your home’s appearance. When your home stands out from the rest, it makes a difference in your home’s value. Fresh paint, a well-maintained yard and garden, and a clean look will increase your home’s value. The highest return on investment generally comes from kitchen and bathrooms, so be sure these are updated and well-maintained.
- Opt for a biweekly payment plan. The best way to build equity on your home is to make payments against your balance as regularly as possible. A biweekly payment means that you will be able to pay about 26 times throughout the year instead of the typical 12 when you pay monthly. This means more commitment to clearance of your mortgage balance—which has affects your equity positively.
- Snowball all other savings to the mortgage. If you have other debts you are paying aside from the mortgage, then you can channel any savings you have towards mortgage repayment. If you have completed making payments on something else, like a car loan, channel the same amount you’ve been paying towards repayment of your mortgage.
- Channel your budget excesses to the mortgage. If you have a monthly budget for all of your expenses and you’ve saved some $100 or even less then you should commit this amount of money towards repayment of the mortgage.
- Make extra income. If you’ve been earning $3,000 a month, try aiming for slightly more, like $3,200- a small increase in your income allotted to your mortgage could end up making a huge difference in the amount you pay over the course of your loan.
Building equity on your home is a strategy which you must lay out and commit yourself to. If you don’t take the time and care to build equity in your home then you risk suffering negative equity by market forces, which can badly water down the value of your home and cause you to owe more on your mortgage than your home is worth.