Have you owned your home for some time? You may have a sizable amount of equity built up, but you would like to see this figure increase. And if you’re a new homeowner, maybe you want to increase your equity so you can convert it into cash.
Either way, there are several ways to pull this off. Keep reading to learn more.
What is Considered a Good Amount of Home Equity?
You’ll need at least 15 to 20 percent equity in your home to qualify for most traditional home equity products. These include home equity loans, home equity lines of credit (HELOCs), and cash-out refinance loans.
But how do you calculate your equity? Simple. It’s the difference between your home’s market value and your outstanding mortgage balance. To illustrate, if your home is worth $500,000 and you owe $250,000, you have $250,000 in equity.
Outstanding loans against the property are also factored into the equation. So, using the same example from above, if you currently have a HELOC against the property with a remaining balance of $35,000, the amount you have in equity will drop to $215,000.
Ways How to Build Equity in Your Home
Need to boost the equity in your home? Fortunately, there’s no shortage of ways to help you increase it:
Invest in Home Improvements
The cost of home improvements could be steep, but the return on investment makes it worthwhile. In fact, your return on investment (ROI) could be anywhere between 50 and 75 percent and boost your equity tremendously.
Before deciding which upgrades to make, consult with a real estate professional in your area to determine which has the most significant impact on home values.
Wait for Your Home’s Value to Increase
Home values change over time. Suppose you’re in no rush to relocate. In that case, you could patiently await an increase that builds your home’s equity without any effort on your part.
Make a Large Down Payment
If you’re planning to buy a new home soon, you can make a larger down payment to create instant equity. Here’s how it works:
- You buy a home with a market value of $330,000 and a purchase price of $325,000.
- The lender requires a 3 percent down payment, but you decide to increase this amount to 10 percent.
- With a down payment of 3 percent ($9,750), you’d start off with $14,780 ($330,000 – $315,250) in equity. But by putting 10 percent down, you’ll increase your equity to $37,500 ($330,000 – 292,500).
Plus, you can avoid private mortgage insurance if your down payment is 20 percent or higher.
Pay More Off Your Mortgage
Consider making extra principal-only payments towards your mortgage each month. You’ll start to see the balance decrease more rapidly since most of the regular monthly payment goes towards interest at the beginning of the mortgage term.
Be sure to specify that the extra payments should be applied to the principal. Otherwise, the lender will use it towards subsequent monthly payments, which won’t expedite the equity-building process.
Don’t have a ton of extra funds lying around? You can pay your lender biweekly to add an additional mortgage payment to your account each year. Financial windfalls, like work bonuses and tax refunds, are another way to pay down the principal balance on your mortgage faster.
Refinance Your Mortgage to a Shorter Term
Your monthly mortgage payment will be higher, but you’ll likely get a lower interest rate and save a bundle interest with the shorter repayment term. Plus, your principal balance will go down faster, which means you’ll build up equity in your home more quickly.
Avoid Taking Home Equity Loans or HELOCs
If you take out a home equity loan or HELOC, the amount you borrow must be deducted from your home’s equity. For example, if your home is worth $395,000, and you owe $250,000 on the mortgage and $40,000 on a home equity loan, you’ll have x ($395,000 – 250,000 – 40,000) in equity.
What Can You Use Your Home Equity For?
Maybe you’re reading this and wondering why it’s important to build equity. For starters, you can use it to make big-ticket purchases or accomplish significant financial goals, including the ones listed below.
Complete Home Improvements
Instead of putting off costly home repairs or emptying out your savings account, you can tap into your home’s equity to cover expensive home upgrades. You can also get tax benefits if you secure a home equity loan or HELOC to pay for home improvements.
Buy a New House
Are you in the market for a second home? The lender may allow you to use the loan proceeds to make a down payment on the property or pay for it in cash.
Retiring
If you’re nearing retirement, you could qualify for a reverse mortgage that lets you cease monthly payments and disperses funds to you based on your home’s equity. You won’t be liable for the loan balance unless you relocate for six or more months in a year or sell the property. But when you pass away, the heirs to the property will have to sell the home to repay the loan, get a new mortgage on the house or relinquish possession to the lender who will sell the home to recoup what they’re owed.
Pay Off Debts
Tired of being saddled down by high-interest credit card debt? You can consolidate what you owe with a home equity loan, HELOC, or cash-out refinance with a lower interest rate. Doing so will boost your credit score and could save you several hundred or thousands in interest, assuming you don’t use the cards again.
How to Borrow Against Your Home Equity
Ready to explore ways to borrow against the equity in your home after learning how to build equity in your home? Below are some viable options.
Residential Equity Agreement
Prefer to unlock the equity in your home without taking on more debt? Consider a home co-investing product that lets you do just that with no strings attached. You can get a lump sum of cash today in exchange for a share in your home’s future appreciation or depreciation. There are no monthly payments, and you could get approved with a FICO score as low as 620. Even better, you can use the funds to pay off debt, make costly home renovations, retire early, start a business or however else you see fit.
Home Equity Loans or HELOCs
Home equity loans and HELOCs act as second mortgages. With a home equity loan, the lender gives you a lump sum that’s repayable in equal monthly installments. But with a HELOC, you’ll get access to a credit line that you can make withdrawals against up to a set amount. You’ll make interest-only payments on the amount you spend during the draw period and principal and interest payments once the draw period ends.
To illustrate, assume the lender lets you borrow up to 80 percent of the equity in your home. If the property is worth $275,000 and you owe $175,000, you could be eligible for a home equity loan or HELOC of up to $45,000 ($275,000 * .80 – $175,000).
Cash-Out Refinance
With a cash-out refinance, the equity you borrow against and your outstanding mortgage balance are lumped into a single loan product. For example, if the lender lets you tap into 85 percent of your equity and you owe $285,000 on a home that’s worth $400,000, you could potentially borrow $55,000 ($400,000 * .85 – $285,000).
At closing, you’ll receive $55,000, and you’ll commence repayment on the new loan balance of $340,000 ($285,000 + $55,000).
