What are the Benefits of Building Home Equity

Becoming a homeowner and living a luxurious life is a dream of almost everyone around us. But as someone once said, “If it were easy, everyone would do it.” It’s a long journey to become a homeowner on which many set sail, but very few achieve it.

Why? Because it’s a massive investment that’s not in everyone’s budget. But guess what? There’s another easier way to buy your property. Instead of paying 100% amount to buy a home, you can pay a percentage of it and access a mortgage loan.

As you pay off the mortgage loan with an interest rate, you’ll keep on acquiring more and more home equity. Here, you may want to know, “Okay, I have significant home equity. Are there other perks I can expect when owning high home equity?” Well yes, there is, and we’ll tell you all about it in this blog.

First, let’s take a step back for all the non-financial people. Wouldn’t you want to know, “How do you can calculate and build a home equity?” We’re way ahead of you.

Key Takeaways

How to Calculate a Home Equity?

In simple terms, reducing your mortgage loan increases your home equity. Here’s a formula for calculating your home equity.

                                                Value of the home - Mortgage owed

Here’s an example that can help you understand better. That’ll help you understand home equity better.

Suppose you’re buying a home worth $250,000. You’ve paid $25,000 within the first year. Here’s how the home equity will be calculated

                                                $250,000 – $25,000 = $225,000

That accumulates to you owning 9% of the home equity.

Where Does Home Appreciation Come In?

Just like everything around you, your home value doesn’t remain the same. There are various factors for home appreciation. These factors may include economic conditions, home maintenance, or location.

That may change the property in your favor. Let’s revisit the earlier example. Your property which was worth $250,000 has experienced a home appreciation and is now worth 300,000. Here’s what will change in the equity equation.

                                            $300,000 – $25,000 = $275,000

That means you have more home equity than you did before.

Explore: Calculate Your Monthly Mortgage

How do You Build Home Equity?

Your home equity increases with the mortgage loan you pay off. But did you know there are ways you increase your home equity faster? If not, you’re about to.

Let’s look at some ways you can increase your homeowner faster and unlock the benefits that come with it.

Greater Down Payment

When you buy a home on a mortgage, there’s an upfront one-time payment that needs to be paid. Usually, the down payment on property deals is 3% - 4% of the purchase. This can go as much as 20%.

As there’s a maximum limit, you can increase the budget for the down payment and grab a larger chunk of equity from the start.

Another reason to pay a 20% down payment is so you can avoid paying for private mortgage insurance. This is an additional percentage of the home value which your lender may require you to pay, in case you default on your loan.

Make Larger Monthly Payments

Yes, you can set mortgage terms with your lender about your monthly payments and the years needed to pay 100% home price. But what if you suddenly have more cash in hand and you want to pay a higher monthly payment than the agreed-upon amount? Can you do that? Of course, you can, as that’ll cut down your loan faster and increase your home equity.

And that’s not all. You don’t have to even wait for the month to start or end so that you can make the payment. You can even make weekly and bi-weekly payments as well.

Yes, we know what you’re thinking. We agree that making quicker payments is easier said than done. You can start by making your budget and looking at the recurring expenses you need to make.

For that, check out our previous blog, where we talked about homeowner expenses. This can help you plan your financials accordingly and grow your equity.

Home Improvement and Renovation

We’ve talked about how home appreciation can increase your property value, which helps you gain more equity. One of the home appreciation methods is a home remodeling and improvements.

These changes can be repainting the entire home, upgrading your bathrooms, setting up lush green grass at the entrance, and more.

Now, let’s address a common query for homeowners, “Will my investment really result in home appreciation?” That’s a tricky one to answer. It usually does, but home improvement is just one of the contributing factors.

Here, you might want to take guidance from an experienced real estate agency. Reputable individuals who have seen numerous home appreciations happen and have smoothly executed many real estate deals.

This is How You Can Use Your Home Equity

Now that we’ve talked about home equity, how to calculate it, the impacts of home appreciation, and what can you do to increase it, we’ll move on the answering your question. The reason why you’re here is “What Are the Home Equity Advantages?”

Here is the answer to 3 answers to your question.

Cash-Out Refinance

Every time you pay a percentage of your mortgage, you’re building your equity. But here’s the deal, those are mere numbers and percentages. Can you use that equity if you’re faced with a major expense? This would be your question, and the answer (surprisingly) is “Yes”.

All you need is cash-out refinance, which is to convert your equity-owned into cash. Here’s an example. Suppose you buy a property worth $300,000. You pay a down payment of $50,000. You’re left with $250,000 more to pay.

This is how the usual mortgage process works, as we’ve explained the calculation above. But when you’ve built significant home equity, you get the option to cash out. This means supposing you’ve paid $100,000 in mortgage, and there’s a $200,000 loan. If you decide to cash out $50,000 to pay your expenses, your new mortgage loan will be $250,000.

Yes, you’ll have to start paying more mortgage amounts, but look on the bright side, you manage to pay off the expense you wanted. That how cashing-out your equity can be beneficial for you.

Lower Interest Rate

The interest rate is usually collateral by the lender if you default on the loan. When you acquire significant equity, the lender has a great amount of collateral to use if you default.

With the trust developed between you and your lender can result in a lower loan-to-value ratio, resulting in lower interest paid on your mortgage loan. This means the more equity you have, the more money you save.

The money you save can be used to be reinvested for home appreciation and taking care of other expenses.

Access Home Equity Line of Credit

You must be used to getting loans at higher interest rates and other unfavorable terms. That can change when you own a significant equity in your home. The home equity line of credit (HELOC) enables you to use your house as collateral and borrow a loan.

This line of credit works like a credit card, where you can draw money whenever you want. Do have in mind that there’s a minimum limit set by some lenders. This amount is the minimum money you can take out.

The draw period is usually up to 5-15 years, where you don’t have to repay the whole amount. This period is where you need to pay the interest and keep the line of credit active.

Once the draw period ends, it’s time to pay back the principal amount and the interest.

Explore: Get Today's Mortgage Rates and Stay Informed

Conclusion

It all starts with that first mortgage payment for you to start gaining equity and avail of the perks that come with it. This was a comprehensive guide about home equity, how you can build it, and the advantages you can enjoy.

For building your home equity, the first step is to find a home for a mortgage. Since it’s a significant investment, you’d want a home that meets your expectations and preferences.

That’s where HAR comes in as your real estate partner to guide you toward your dream home. After you’ve successfully bought a house on favorable mortgage loan terms, HAR remains your trusted friend for fruitful advice and suggestions.

We present a smooth roadmap to build your equity faster and start seeking the homeowner equity benefits, faster.

FAQs

1. How can I calculate my home equity?

You can calculate your home equity using the following formula: Value of the home - Mortgage owed. For example, if your home is worth $250,000, and you've paid $25,000 toward your mortgage, your home equity would be $225,000

2. What factors contribute to home appreciation?

Home appreciation can result from various factors, including economic conditions, home maintenance, and property location. These factors can positively impact your home's value over time.

3.How can I increase my home equity faster?

There are several ways to increase your home equity faster, including making a larger down payment, making larger monthly mortgage payments, and investing in home improvements and renovations. These strategies can help you build equity more quickly.