Homeownership has many benefits, including the ability to use equity for financial goals. You can use this money to pay for major home improvements, eliminate high interest credit card debt or cover college costs.
When do you start building equity in your home?
How much you intend to invest depends on your finances and the type of property. The best way to build equity is to pay a substantial amount of money down on the price of your property, and then continue to make payments.
Aside from a significant down payment, you may also want to invest in improving the surrounding area. A new bedroom, a renovated kitchen or a modernized bathroom will help increase your home's worth and your equity.
It is possible to build equity with a higher rate of interest on your mortgage. Often, you can save thousands of dollars in interest by shopping around for better rates with several lenders.
Refinancing your mortgage into a shorter loan term can also increase the amount of equity you have built up in your home, though it will come with higher payments. By paying your mortgage biweekly and/or more than what is required, you can reduce the monthly payment.
Building equity can take some time, but once you do it's a valuable asset. You can borrow money by applying for a Home Equity Line of Credit (HELOC), a secured loan using your home as collateral. Or you can take out a Home Equity Loan to borrow from the equity in the home.
What is equity building?
Building equity is a long-term process. Making regular mortgage payments is a way to build equity in your home while your property value increases and you reduce the loan balance. You can accomplish this through making a large down payment, reducing your mortgage interest rate, refinancing or utilizing other strategies to increase your home's equity and eventually sell the property for cash.
When you are ready for a sale, the amount of equity you have can play a large role in how much you get. The equity will also determine how quickly and for how much money you can sell your home.
You can also use the equity in your home to cover any other events that may arise or for emergencies. If you want to, you can use your equity for medical costs or college tuition. You could also borrow against equity to fund your wedding, buy a larger house or finance a business.
Ideally, you want to have at least 15% to 20% of the equity in your home before you can borrow against it. Many mortgage lenders require this level of equity to let you borrow.