Top 5 Ways To Build Home Equity

By Magnolia Realty | Jun 1, 2020

What is Home Equity?

It is the percentage of your home’s valuation that you own, and a key denominator to build your homeownership.

It is evaluated by subtracting the money you still owe to your lender on your loan from the present market valuation of your home. Home equity determines how much money you could make from selling your home, or how large of a home equity loan you can take out.

How to calculate & how much equity you have?

When you buy a house and pay a down payment, you can calculate your home equity. Let say you pay Rs.10,0000 down on an Rs. 25,00,000, so your down payment is 4%, and so is your equity. If you have 5-7% equity then it is considered good because it means you do not have to spend for years saving for 20 per cent down or more before you own the house.

How to Build your Home Equity?

1. Property Appreciation

In the current scenario, residential property appreciation is more than shares, gold or any other investment. Although building your home equity through appreciation takes a bit longer, in the general trend, appreciation has been a silver lining for many homeowners.

You can calculate market appreciation by subtracting your current loan balance from your home’s current value. The result then will be divided by your home’s current value. 1/8th of this additional per cent equity is from paying down payment your loan, and the rest is market appreciation.

So, the sooner you clear the payment of your home, the more you will savour the taste of your equity value. It is like buying stocks and benefitting as the value of stocks rise up. Nevertheless, there is a difference: while you will pay capital gains on rising stock value, you will get a tax exemption on primary home capital gains.

2. Larger Down Payment, More Equity

Many people find it convenient to pay less on a down payment, but as we observe that to save extra cash adversely affect financial interest in the long-term to build equity through appreciation. Therefore, you need to carefully consider three factors: down payment, monthly budget and savings.

3. Use Financial Windfalls

What are financial windfalls? These are extra liquidity you would get through office bonuses, family gifts, inheritances or some extra income. As we have said earlier that the more you clear your debt, the more you increase your equity through appreciation, so pay down your mortgage whenever you get some amount of money. Talk to your lender how they recalculate the balance if you pay in lump sums.

4. Make your Loan Payment in Quick Successions

Talk to your lender whether you can make your loan payments every two weeks instead of once a month. This will help to build your equity faster and save lots of years in long-term home loan tenure. Just be sure your lender won’t charge you extra for processing semi-monthly payments.

5. Make your Home Improvement

Home improvements like new appliances or cosmetic features such as kitchen chimney, air-condition, and paint is less likely to increase your home value. You can significantly increase your home equity through the additional bathroom, new kitchen set-up or extension of a balcony. These extra improvements will increase your equity significantly, but ensure that whatever money you are investing in improving your home will add the financial value you are looking at. You can evaluate the value by comparing it with neighbouring similar residential properties.

Summary

Real estate has a great valuation, and you can always borrow or sell your home to increase your equity. A well-known way to get to your equity is borrowing through the equity line of credit (HELOC). Another approach can be beneficial is cash-out refinancing, but you need to talk to your lender to know the best approach.

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