Building Equity

There are quite a few ways to build equity in your home faster than a traditional fixed rate mortgage will allow. Within the first six years of your home, for every dollar you apply towards your mortgage, approximately twenty cents will go towards reducing your principle, or the original loan amount borrowed.

One way to increase the amount applied towards your principle is to increase your monthly payment to a higher amount. If this is not possible than structuring your mortgage with a bi-weekly payment plan will help to decrease your principle balance and increase the equity in your home.

Not all lenders allow you to structure and pay weekly or bi-weekly directly with them. You can do this on your own if you are diligent. Take your monthly mortgage payment and divide it by 4. If you always dedicate or set aside this dollar figure every week then in the months that have 5 weeks instead of 4 you add those additional funds to your principal that month. At the end of the year you will have put an entire monthly payment directly towards reducing your principal balance.

If you can make one extra payment per year you will end up knocking 6-7 years off of your mortgage.

There is one very simple way to build equity without making any additional payments on your mortgage. That is simply to own property. In some areas of the country, southern California for instance, property values have risen over 20 per cent per year for the past couple of years. Although property is not guaranteed to increase in value, you can see that the more real property that you own the chances are very good that the more equity you will be building.

Although property values are not garunteed to increase they have always risen and historically performed well. There may be times where values decrease slightly or stagnate but your investment in real estate will 99% of the time increase in value over time.

Building equity also comes from natural appreciation in your property. If you are in an up and coming area the value of your home, and equity will increase at a quicker pace.

If you get a tax refund check every year, rather than spending it or put it in your savings account, apply it towards paying down the principal of your mortgage. Interest rates offered by most savings accounts and CD's do not come close to the interest rate charged on your mortgage loan. Paying down the principal in the early years of your loan can significantly lower the total interest expense in your mortgage over the life of your loan.

Instead of making an extra mortgage payment, many of the savviest personal real estate investors use any additional capital to invest in additional assets, which over an quivalent time period tend to build more value than additional payments to principal. Instead of trying to pay off your house 7 years faster, in certain areas it may be more profitable to invest that money in additional property. Assuming a 30 year mortgage, ask yourself, "How much was my house worth 23 years ago?". In most areas of the country, the answer might be 1/5th or even less of its current value. Now ask yourself how much even a relatively small additional investment would be worth in the same amount of time. In many areas you will likely find that owning more property is more lucrative than paying down principal, because they can always print more money, but they aren't making any more land.

Building a home also has an advantage over buying an existing home. When you build you usually end up with instant equity at the end of the construction phase. If you have good credit and want to build you should consider a construction loan or a one-time-close loan.

Building equity is the usual goal for many home owners. Equity can allow you to moe up to a newer or bigger home you choose, or maybe buy a car.

Two very common ways to build equity are payments made on the mortgage and home appreciation. It a market with large appreciation that will be a much bigger source of home equity creation than loan payments. Also, the majority of loan payments are interest the first several years so not much home equity is created.

Homeowners can increase the equity in their home by remodeling. Investing in your home can increase the market value. The two areas that will increase the value of your home the most are the kitchen and bathroom.

Another way to build equity in a home is called Sweat equity. Sweat equity is a term used to describe the contribution made to a project by people who contribute their time and effort. It is contrasted with financial equity which is the money contributed towards the project.

One of the best methods of building equity is to get a good deal on the home when you buy it. Take advantage of a down market by looking at foreclosures or finding a distressed seller who just needs to get the home off their hands and buy at 20% or more below comparable sales in the area.

When taking on a project designed to build equity its best to speak with an expert. Will you get the bang for your buck by doing a kitchen remodel or should you focus on the bathroom instead? Quick answer is the kitchen of course. However the long answer should be found by discussing your needs with an appraiser.

» DISCLAIMER: The information contained in this article on 'Building Equity' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.