For homeowners, equity is their most valuable asset, as it equates to their financial interest towards that property. It is the actual value of the property they have paid for. In other words, if you bought a home through a loan scheme, your home equity would be the amount you paid back, minus the money still owed to the lenders. Building home equity is a primary reason for potential buyers to invest in properties, even if it means borrowing from a lender. This is because a property can create a great return of investment. If you can successfully build home equity, the return can be even greater. Read below to find out the best ways you can do that.
Key Points to Know About Home Equity
- Home equity fluctuates with time for two reasons. One reason is more and more installments being paid by the homeowner to reduce the loan. Changes in the real estate market can also affect home equity.
- Paying the down payment when buying a home automatically adds to its equity.
- If a property was purchased via a loan, it means the lender still has financial interest in that property. The homeowner has to pay off the borrowed money to increase their own equity.
- Your home equity will grow as the value of the property appreciates. It is not a liquid asset though, but it contributes to an individual’s net worth.
- You will not be able to convert your home equity to cash easily, because the price of the property depends on the current real estate market. The price appraised does not guarantee that the property can be sold at that price.
Drawbacks of Using Home Equity
Certain banks and financial institutions may allow further mortgages and loans based on your home equity. This means you can take a financial loan with your home equity as collateral, but this might be a risky process. If you already have an outstanding loan balance and take another mortgage on the home equity you built so far, despite regular payments it will take years for you to get back the home equity you so carefully built. The immense pressures of multiple loans can also take a toll on you. Therefore, it is always best to build home equity instead of reducing it.
Building Equity the Right way
Now the question remains, how can one build home equity? These are the best options:
- The higher the down payment, the higher your home equity. If you are a homeowner who wants to own as much as your home as possible in the beginning, this is the best option. Let the home loan lender have as little interest in the property as possible!
- Be aware of the type of home loan you are getting into. Some home loans have fixed interest rates while others have flexible rates, which means your equity will also depend on how you pay against these schemes.
- Ensure regular payment of your installments. If possible, try to pay slightly larger sums of cash or lump sums from time to time to lower the loans and increase your equity.
- Don’t stay away from your home. Stay in it and manage the property. This will give a good impression to future buyers and also help appreciate the price of the property.
Consider home improvement. Renovating and remodeling some rooms, interior decor changes, and even landscaping can add to the value of your property. Along with effective care of the property, the market value of the property is sure to increase and so is your home equity.
Building home equity seems like a slow process, but it is worthwhile when you enjoy the perks of being a profitable homeowner! Take advantage of real estate market changes and smart home financing schemes so that with easy payment you can quickly scale up your home equity. Home improvements such as automation products and landscaping can also help your home equity brilliantly.