Building equity in your home is one of the primary benefits of homeownership and can be used for a variety of financial goals. You can use this money to pay for major home improvements, eliminate high interest credit card debt or cover college costs.
When should you start building equity?
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.
You should consider making improvements to the property in addition to investing a lot of money. Adding an extra bedroom, renovating the kitchen or updating the bathroom can help boost your home's value and, therefore, your equity.
Another way to build equity is by increasing your mortgage interest rates. Often, you can save thousands of dollars in interest by shopping around for better rates with several lenders.
It is possible to increase your home equity by refinancing, although the monthly payments will be higher. By paying your mortgage biweekly and/or more than what is required, you can reduce the monthly payment.
Equity in your home can be built over time, but you can access it at any point. 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. It involves making regular, consistent mortgage payments while the property values increase and lowering your 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 decide to sell your home, your equity will play a major role in the final price. It will also affect how quickly you can sell the home and how much you'll walk away with.
You can also use your equity to pay for other life events or emergencies. If you want to, you can use your equity for medical costs or college tuition. You could borrow against your equity in order to finance a wedding, a move to a more expensive or larger home or even a business venture.
Ideally, you want to have at least 15% to 20% of the equity in your home before you can borrow against it. In fact, most mortgage lenders prefer that you have this level of equity before they'll let you borrow against it.