{"id":773,"date":"2019-04-15T01:34:23","date_gmt":"2019-04-15T01:34:23","guid":{"rendered":"https:\/\/theme.visualmodo.com\/politic\/?p=773"},"modified":"2019-10-19T02:13:14","modified_gmt":"2019-10-19T02:13:14","slug":"6-smart-ways-to-build-home-equity","status":"publish","type":"post","link":"https:\/\/theme.visualmodo.com\/realestate\/6-smart-ways-to-build-home-equity\/","title":{"rendered":"6 Smart Ways to Build Home Equity"},"content":{"rendered":"

Home equity is the percentage of your home\u2019s value that you own, and it\u2019s key to building wealth through homeownership. Let\u2019s take a closer look at how to build home equity without blowing your budget\u00a0\u2014 and how to access it when you need it.<\/p>\n

How much equity do you have?<\/h2>\n

Equity is easy to calculate when you first buy a home because it\u2019s your down payment. For example, if you put $11,250 down on a $225,000 home, your down payment is 5 percent and so is your equity.<\/p>\n

\"6<\/p>\n

From 2016 to the first quarter of 2018, most first-time homebuyers in the U.S. started with about 7-percent equity, according to Inside Mortgage Finance. This is encouraging because it shows you don\u2019t need to spend years saving for 20 percent down or more before you buy. Repeat home buyers started with more equity, at about 17 percent.<\/p>\n

How to build your equity<\/h2>\n

Here are six ways your home can create wealth for you. Some require time, money \u2014 or both. A lender can help you decide what works best for you.<\/p>\n

1. Let your home appreciate<\/h3>\n

Building equity through appreciation can take little time or a lot, depending on the market. With home prices going up as they have in recent years, appreciation has been a boon for many homeowners. Zillow’s research\u00a0indicates that the median home value grew from $185,000 in April 2016 to $216,000 in April 2018. If you bought a home for $185,000 in April 2016 with a down payment of $12,950, your beginning 7-percent equity would have grown to 23 percent by April 2018.<\/p>\n

We calculate this by subtracting your current loan balance ($165,600) from your home\u2019s current value ($216,000). Then we divide the difference by your home\u2019s current value. One-eighth of this additional 16 percent equity is from paying down your\u00a0mortgage, and the rest is market appreciation.<\/p>\n

If you waited two years and bought the same home in April 2018 with a 20-percent down payment of $43,200, you started with 20-percent equity. You also used 3.3 times more cash to make the purchase. And here\u2019s the kicker: Your\u00a0total monthly housing cost\u00a0would be the same \u2014 about $1,050 in both cases.<\/p>\n

This example illustrates two things: First, the power of home appreciation<\/a>. It\u2019s a lot like buying stock and benefitting as its value goes up. But there\u2019s also a difference: While you\u2019ll pay capital gains on rising stock value, you\u2019re exempt from paying taxes on primary-home capital gains up to $250,000, or $500,000 for married couples.<\/p>\n

Second, waiting to \u201csave enough\u201d isn\u2019t the primary factor in determining if you can afford to buy a home. When it comes to qualifying for a loan, lenders do indeed look at your down payment. They\u2019ll also want to know how much you\u2019ll have in cash reserves after closing. But there are lots of\u00a0options for low down payments\u00a0that require minimal reserves.<\/p>\n

Your monthly budget is the primary factor lenders consider when deciding whether you can afford a home. Lenders will allow you to spend between 43 percent and 49 percent of your income on monthly bills, which is actually on the high side and could strain your budget. Since 2016, most first-time buyers have spent about 38 percent of their income on housing and other debt, which is a pretty safe cap for budgeting.<\/p>\n

2. Make a larger down payment<\/h3>\n

You can do this but, as we\u2019ve seen, waiting to save extra cash can go against your broader financial interests if you lose the chance to build equity through appreciation. Therefore, you must strike a balance among down payment, monthly budget and savings for other priorities. A good lender can provide rate and market insight to help you do this.<\/p>\n

3. Use financial windfalls<\/h3>\n

Take advantage of work bonuses, family gifts and inheritances\u00a0to pay down your mortgage. If you do pay down in lump sums, see if your lender will recalculate (or \u201crecast\u201d) your payment based on the new, lower balance.<\/p>\n

4. Make biweekly payments<\/h3>\n

Make mortgage payments every two weeks instead of once a month. Over a year, this will add up to 13 monthly payments instead of 12. You\u2019ll build equity faster and shave five to six years off a 30-year mortgage. Just make sure your lender isn\u2019t charging extra for processing semimonthly payments.<\/p>\n

5. Cut your loan term in half<\/h3>\n

Take out a\u00a015-year mortgage\u00a0instead of a 30-year mortgage, and you\u2019ll build equity twice as fast. Two caveats here: You\u2019ll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying.<\/p>\n

6. Make home improvements<\/h3>\n

New appliances or cosmetic features like paint are unlikely to increase value. Only big improvements like new kitchens, or additional bathrooms or other rooms will\u00a0add meaningful value. Make sure the cost of such improvements will create the added value you\u2019re looking for.<\/p>\n

How to use your equity<\/h2>\n

You must borrow or sell your home to use your equity. The three most well-known ways to get to your equity through borrowing are a home equity line of credit (HELOC), home equity loan or cash-out refinance.\u00a0Compare the pros and cons of each. Rates are rising right now, so these borrowing options might cost more in the future. Talk to your lender to determine the best approach for you.<\/p>\n","protected":false},"excerpt":{"rendered":"

Home equity is the percentage of your home\u2019s value that you own, and it\u2019s key to building wealth through homeownership. Let\u2019s take a closer look at how to build home equity without blowing your budget\u00a0\u2014 and how to access it when you need it. How much equity do you have? Equity is easy to calculate […]<\/p>\n

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