You will often hear that home equity is a good thing to have. But why? And what does home equity even mean?
Home equity refers to the part of your home that you own in full. If you have a home worth $ 300,000, but you owe $ 200,000 on your mortgage, you have $ 100,000 of equity left. Or, to put it another way, you calculate equity by taking the market value of your home and subtracting your mortgage balance.
Home equity is a valuable thing because you can borrow against it when you want or need it. Suppose you are faced with an emergency expense and you don’t have any money in savings to cover it. If you have enough equity in your home, you can borrow against it to access the cash you need.
There are different things you can do to increase the amount of equity in your home. Here are a few options you may want to consider.
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1. Make a larger deposit at closing
It is often advisable to make a down payment of 20% when buying a home. That way, you won’t have to pay for Private Mortgage Insurance (PMI), an expensive premium that makes owning your home more expensive.
But some mortgage lenders will let you deposit less than 20% at closing. You may be able to buy a home with only 5% down, or 10% on a conventional loan. But the more money you put into your fence, the more you will start to increase your home equity because you will own more of your home.
2. Pay off your mortgage at an accelerated rate
Once you’ve signed your mortgage, you’ll need to make a specific payment each month. But that doesn’t mean you can’t pay more. If you put extra money in your home loan on a monthly basis, or if you make different lump sum payments in your mortgage when you get extra money (for example when you get a tax refund or a premium at work), then you will reduce your loan principal. The result? More fairness for you.
3. Stay at home for several years
Homes tend to increase in value over time. So if you stay in the same house for a number of years rather than moving out every few years, you will have the opportunity to increase your equity.
Suppose you buy your house for $ 300,000. If after 10 years the value of your home increases to $ 350,000, you will automatically increase the amount of equity you have as a result of that increase.
Having more net worth gives you a world of options. When you have a lot of equity in your home, you can often borrow affordable money when you need it through a home equity loan or line of credit.
Having additional equity also allows you to take advantage of cash refinancing, which is another affordable way to borrow when mortgage rates are low. It’s worth doing what you can to build equity in your home to give yourself as much financial flexibility as possible.