You have likely heard that word equity before when it comes to homeownership or perhaps you are looking to increase the equity in your own home. If you haven’t, it is important that you familiarize yourself with it and make strategic decisions to increase your “home equity”.
What is Home Equity?
Home equity, simply put, is your total loan (mortgage) less the value of your property. So let us say you owe $150K on your mortgage, but your home is worth $250K, you have $100K in equity in your home.
Your home equity can go up in many different ways, but the two most common ways home equity is increased is by either paying down your mortgage or your property value going up.
How Can Homeowners Quickly Increase the Equity in Their Home?
1. Making lump sum payments: Making a large down payment is the best way to kick-start equity in your home. In addition to this, most mortgages have prepayment options that allow you to make annual/monthly lump sum payments towards your mortgage interest free. Making these lump sum payments not only increases your home’s equity, but it also decreases the amount of interest you will pay back on your loan over time.
2. Increasing curb appeal and/or completing renovations: This is a very common way to increase your home’s value. Make sure to do your research before committing to a renovation project to ensure that you are going to get the most return for your investment. If you are the type of person that likes to take on DIY projects, it is a great way to reduce the cost of a renovation while still gaining the equity you are looking for. While a great option, be sure that you are completing work that does not require a licensed contractor or other professional.
When hiring a contractor, be sure that you check their references and confirm that they have liability insurance for the type of work they are going to be completing. You will also want to have a clearly stated scope of work with costs to keep the project on track. You will pay more to have a contractor complete the work, but their professional touch goes a long way to increasing equity in your home.
With any renovation project, be sure to advise your insurance broker before starting so they can advise of any insurance impacts because of the changes to the home- especially if major such as an addition.
3. Opting for accelerated mortgage payment plans: When you are looking at mortgage payment options, perhaps you noticed the variety of the different payment plans. Each plan is unique and offers a faster way to pay off your mortgage.
For example, an “accelerated bi-weekly” payment plan will slightly increase how often the money is pulled from your bank account so you end up paying less interest and pay your mortgage off faster.
Taking out a shorter mortgage term will also help you pay down your mortgage by increasing the amount you pay each month- consider a 15 year mortgage vs a 25 year mortgage. It will reduce the interest you pay as you will be paying over less time.
These 3 ways are great tricks to start paying down that mortgage faster and to increase your home’s equity at the same time!
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