The Building Blocks of Building Home Equity

Did you know that home equity doubles as a long-term wealth-building strategy?  Mortgage payments reduce what you owe as your home gains value, which causes it to function as a “forced savings account.” Unlike other assets purchased with a loan (such as cars), houses do not lose value while you pay them off.

Another perk of building home equity is that it can be converted into cash through a home equity loan or another line of credit.

If you’re interested in increasing your home’s equity, here’s how lowering your SLC mortgage loans, increasing your home value, or more can help.

Pay More on Your Mortgage

Mortgage payments cover both the interest and principal. Most mortgages have amortization schedules where you can make payments of equal installments over a specified period until you pay off your loan. Initially, a large portion of your payment will go towards your interest. Over time, however, more of the amount will go to your principal.

If your budget allows for it, consider paying more than you have to. Doing so increases your equity by decreasing your outstanding loan. Also, make sure that your money covers the principal, not your interest.

There are multiple ways you can pay more money on your mortgage, including scheduling extra payments, adding a fixed sum to your payments monthly, or using the extra money as tax gifts and tax refunds.

Make a Big Down Payment

Down payments offer immediate equity. The bigger the down payment, the more equity you can start with. As an additional perk, if you can put down at least 20 percent, you can avoid paying private mortgage insurance (PMI). Still, it’s essential to assess your budget and financial goals when determining the amount you’re putting down.

Refinance to a Shorter-Term Loan

Refinancing or switching to a shorter loan term boosts your home equity. Usually, with 15-year mortgages, you get more than just a lower interest rate. A more substantial portion of your payments also goes towards your principal. This move increases the amount of equity you build monthly compared to that of a 30-year mortgage.

Wait for Your Home’s Value to Rise

coins and house miniature

If you’re not in a hurry to build home equity, be patient, and wait. The housing market often fluctuates; so will your home’s value. Local market conditions impact the worth of your home. When home prices and the demand increases in your area, your home value will also increase.

On the other hand, if the market slows down, your value may decrease, and you might lose some equity. These market changes are often out of your control, but they are worth following and keeping in mind. If you want to know more, work with an appraiser or use an online estimating tool to get a better idea of your home’s current value.

Initially, you might not think you’re saving money by making monthly payments for your equity. Think of it this way: you’re building up an asset’s value in the long run. With home equity, your asset isn’t in cash — it’s your home’s value.

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