How do I build more equity in my home?

Real Estate Questions

How do I build more equity in my home? By Discom Realty

How do I build more equity in my home? Understanding home equity

How do I build more equity in my home? answered by Discom Realty Inc.  Thanks for reading another useful article by Discom Realty. We want to be your first choice for all your home shopping needs. Plus, we want to be your main recommendation to all your friends and family for their home shopping needs as well. We hope you enjoy reading this article about home equity and we answer the question – How do I build more equity in my home?

How do I build more equity in my home? - Discom RealtyFirst off, let us answer the question you might be wondering about – What is home equity? Home equity is the value of a homeowner’s interest in their home. Interest is how much money they have invested into their property. In other words, it is the real property’s current market value (less any liens that are attached to that property).

Equity — or the share of the property you actually own — is a benefit to any homeowner. For one, it means more profits when it is time to sell. On top of that, it can also give you cash when you need it — either through a refinance or home equity loan. 

How long does it take to build up equity when you first buy a home?

Because so much of your monthly payments go to interest at the beginning of the loan term, it often takes about five to seven years to really begin paying down the principal. Plus, it usually takes four to five years for your home to increase in value enough to make it worth selling.

The average U.S. homeowner gained $9,700 in equity from the fourth quarter of 2017 to the fourth quarter of 2018, according to a financial report prepared by CoreLogic. This equates to an equity increase of 8.1% year over year. But keep in mind, your equity will fluctuate up or down based on the real estate market.

So, think about it this way – you can build home equity when you increase how much higher your home value is than the remaining debt on the home. You can take an active or passive approach to build equity, depending on your goals, your resources, and your luck.

Now let’s take a look at equity loans. If you decide to take out a home equity loan or HELOC and the value of your home declines, you could end up owing more on your mortgage than what your home is worth. This situation is sometimes referred to as being underwater on your mortgage.  

Even though the amount of equity you can take out of your home varies from lender to lender, most allow you to borrow up to 80 to 85 percent of your home’s appraised value. In order to borrow this amount, you must have an LTV ratio between 80 and 85 percent, which equals 15 to 20 percent equity in your home.

What is an LTV ratio?

The loan-to-value (LTV) ratio is a number that lenders use to determine how much risk they are taking on with a secured loan. It measures the relationship between the loan amount and the market value of the asset securing the loan.

A Loan to Value Ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example, if you buy a home appraised at $200,000 for its appraised value, and make a $40,000 (20%) down payment, you will borrow $160,000 (80%).

Generally, a good LTV ratio for a home loan is 80 percent or lower, which means that the loan is worth 80 percent or less of the value of the home. That is why lenders like to use this ratio because it helps to determine how risky a loan is because a higher ratio means that the loan is riskier to the lender. Furthermore, the percentage from the LTV ratio helps determine which type of loan you can get and what your interest rate will be.

Understanding Loans Using Your Home’s Equity.

Technically, you can use a home equity loan to pay for anything. However, most people use them for larger expenses. There are many common uses for home equity loans, the top of the list is generally remodeling your home.

Did you know that the payments to contractors, supplies, and materials can really add up quickly? It is true and a lot of surprises come into play for change orders and unbudgeted improvements once work has started.  HGTV has plenty of shows that can highlight this – if you like binge-watching home improvement programs like we do.

Here is a little more information about a home equity loan. The term can range anywhere from 5 years to 30 years. Where a home equity line of credit or “HELOC” for short is a little different.

Here are a few common uses of a home equity line of credit (HELOC):

  • Pay for home improvements.
  • Pay off credit cards or other higher-interest debt.
  • Pay for education.
  • Fund your dream vacation.
  • Cover medical expenses.
  • Use as a down payment for a second home.
  • Use as a down payment for a rental investment property.

HELOCs generally allow up to 10 years to withdraw funds, and up to 20 years to fully repay the home equity line of credit. A cash-out refinance term can be up to 30 years depending on the lending institution. Repayment options are the various structures a lender provides for you to repay the borrowed funds.

Here is the big difference between a home equity loan and a HELOC, you will pay higher rates for a home equity loan than you would for a HELOC. Rates on home equity loans are generally higher than they are for home equity lines of credit (HELOCs) because your rate is fixed for the life of your loan. Having this fixed rate can protect you from market fluctuations with a home equity loan. But the rates of the market will directly affect HELOC rates.

With either of these products – your home is used as collateral. Thus, your equity is at stake too. If these are paid off in full prior to selling your home, the balance can be deducted from the money you would have received at closing.

Here is a quick example, you have a home worth $224,000 with a home equity loan being used for $18,000. The amount of equity in your home is 60,000. When you want to sell your home, the lender will take $18,000 at the time of the sale to settle the loan. Leaving you with $42,000 after the sale of your home.

Fortunately, building equity can be easy. First, if you do not need a HELOC or home equity loan, do not get one. If you have one, try to pay it off quickly or just avoid using it. Every month you increase your home equity by making your mortgage payment. 

Here are a few strategies to increase equity faster in your home and also to decrease your overall housing costs.

Location, Location, Location! – How do I build more equity in my home?

If you house-hunting, then we recommend that you might want to choose the suburbs over the city. On average, suburbanites save $9,000 per year on housing and childcare when compared to those living in a city.

Generally, the money you may save on the cost of living in the suburbs can outweigh the added transportation expenses. It is not ideal for everyone but relocating further from the city might make sense financially because to help you get more house for your money, have potentially lower housing costs monthly, and maybe an overall lower cost of living versus city.

That is great news because these saving can go back into mortgage payments, therefore, increasing your equity in your home quicker.

Consider Renting A Room – How do I build more equity in my home?

Sometimes finding a reliable roommate can make sense. Sharing the cost of housing can free up a significant portion of your cash flow, especially in expensive cities. For instance, having a roommate can save you up to thousands of dollars every year.

How do I build more equity in my home? – Rent out a room!

So, if you are a homeowner with room to spare, really consider leasing space to a trusted friend. This extra income can offset the cost of mortgage payments and result in more cash flow going toward savings, investing, or even paying off the car/student loans faster. This extra income can be put towards building up your home’s equity and working to eliminate your mortgage sooner too.

If you want to build your equity even further, there are several ways to do it, including: 

  • Buying in an up-and-coming market. If home values in your neighborhood start to rise, so will your property value. That can mean more equity, too.
  • Increasing your down payment. The more you put down, the less your lender will need to loan you, and the larger your equity stake will be.
  • Paying more on your mortgage. Putting extra toward your mortgage loan — either each month or a few times a year — can help you pay down your balance and increase your share. Consider putting your annual tax refund toward your loan to really make a dent.
  • Renovating your home. Anything that improves your home’s value also increases your equity. Choose your projects wisely and reach out if you need some help getting started.
  • Refinancing your loan. With a short-term loan, like a 15-year, you can pay down your balance faster (and sometimes get a lower rate as well). This can help you build equity more quickly.

Do you have additional questions about home equity? Or are you planning to buy or sell property this year – Discom Realty is ready to help you. Reach out and speak with one of our talented and friendly Realtors today! Call us at 407-739-2833. Thanks for taking the time to read ‘How do I build more equity in my home?’ and we hope it has explained a lot about your home’s equity.