|
 |
How
to Build Up Home Equity |
Your home's equity is a
valuable asset because you can use the equity as
collateral for your loan—you can get money from your
home without having to sell it.
Rates are
Still Low and Home Values are Still High. CLICK
HERE NOW!
Equity:
The difference
between the fair market value (appraised value) of the
home and the outstanding mortgage balance is called
equity. If your
home is worth $100,000 and you owe $75,000 on the
mortgage, then you have $25,000 of equity in your
home. This is what a home equity loan borrows against.
Negative
Equity: When the liens total more than the
property value, you have negative equity. If your home
is worth $250,000 and the liens against it total
$150,000, you have $100,000 in equity. If the amount
of the loan secured against a property is high
relative to the property's value and then property
values drop, you could end up with negative equity.
How To Build Up Your Home
Equity: One of the benefits of buying real estate is that you can buy an expensive asset with a relatively small amount of your own cash. This is called
Leverage. As your home increases in value over time,
called Appreciation, you earn appreciation on the entire property, not just on your down payment amount.
However, leverage can backfire if property values drop significantly and you have to sell your home.
Equity accumulates
in many ways:
- Each time
you make a monthly mortgage payment, the principal
portion of your payment helps build up the equity in
your home.
- Over years of home ownership, home price appreciation can substantially increase your net worth.
- Paying down your mortgage and increasing the value of your home through cost-effective home
improvements are some other ways to build equity.
- Some mortgages help build equity faster than others. An amortized loan is completely paid back during the loan term. A portion of each monthly payment pays the interest owed and a portion goes to paying back the amount borrowed (called principal).
-
The shorter the term of a fully amortized mortgage, the quicker the equity build-up.
Many
borrowers use a refinance to shorten the term of the
mortgage. And brace yourself, even at low rates, a
shorter term means a higher monthly payment. The
benefit is that you'll build up equity faster and pay
far less in total interest over the life of the loan. You build equity faster with a 15-year amortized loan than you do with a mortgage that's amortized over 30 years.
- A home improvement project can add value to your
house; however, some improvements pay off more than
others. Before you decide how much to spend and what
part of your house to spend it on, keep a few facts in
mind.
Equity diminish
in many ways:
- Interest-only loans aren't amortized, so you will not build equity by making monthly payments on an interest-only mortgage. Adjustable rate mortgages (ARMs) that have payment caps can actually deplete your equity. This is called
Negative Amortization.
Negative amortization occurs when interest rates rise and you chose to make the minimum monthly payment due. If the capped payment doesn't fully pay the amount of the interest owed, the unpaid interest is added to your principal balance. So the amount you owe on your mortgage increases rather than decreases.
- Another way to diminish
equity is to refinance into a larger mortgage, take the difference in the two loan amounts in cash, and spend it. Americans have been doing cash-out refinances at a record pace recently. Increased leverage has depleted homeowner's equity by about 15 percent over the past 20 years, according to Federal Reserve figures.
- Letting a property fall into disrepair is another way to diminish your equity. Keeping your home well maintained helps to protect your equity.
Low-Rate Mortgage & Home Equity Loans
Top |
