Within the world of mortgages and home-buying, the term “equity” is a common buzzword. There are literally trillions of dollars in equity in mortgaged properties out there, and there have been various trends through the years in terms of the popular ways borrowers used the equity they built up.
At City Creek Mortgage, we know that particularly for first-time homebuyers, terms like these may seem foreign or intimidating when buying a home. This two-part blog will go over what equity means, how it benefits you, and several tips for helping you raise your equity over time to accomplish major financial goals that it might assist with.
Equity Basics and Importance
Simply put, equity refers to the value of the homeowner’s interest in the home – basically, the current value of the property minus any liens attached to it. Equity you have in your home goes up little by little over the course of a mortgage as you pay down the balance and “own” larger percentages of the property.
As equity builds up, it can be used in a few different ways. Prior to the housing crisis a decade ago, many were using strong equity to cash out and get a line of credit or a beneficial refinance, and there are still many who can benefit from similar areas when they’ve built up enough equity.
Our upcoming sections will detail several ways you can build equity in your home, starting with some of the simplest.
Simple Passage of Time and Mortgage Payments
As we touched on above, you begin building equity in your home as soon as you make a down payment and begin paying the balance monthly. Each payment increases the percentage of the property you actually own, which in turn raises your equity.
Simultaneously, market rates may increase your equity without you lifting a finger. If you buy a home for $200,000 and its value rises to $250,000 within the first few years, this additional $50,000 is represented as equity to you (on top of payments you’ve made, of course). Keep in mind, though, that market values can go the other way and actually hurt equity in some cases.
Making Larger Payments
One simple way to increase your equity if you have the financial flexibility is to make larger mortgage payments each month. Put the additional portion toward the principal amount each time, rather than the interest, and this will help you gain equity faster.
Making Additional Payments
Down similar lines, you might consider paying the same amount, only more often. One common tactic here is paying biweekly rather than paying monthly – you’ll make 26 payments over the course of a full year rather than 24, building a little equity even as the additional amount you pay is barely noticeable each month.
Shortening Your Term
In some cases, your best bet for increasing equity is refinancing your mortgage into a shorter term. If you have a 30-year mortgage, for instance, you might be able to refinance into a 15-year option – this will come with higher payments, but your equity will skyrocket if you can afford them.
For more on building equity in your home, or to learn about any of our mortgage loan services, speak to the pros at City Creek Mortgage today.