Your home equity grows in two ways: the property value increases, and the amount of debt owed decreases. Sounds easy enough, but how exactly do you enhance these two factors when you’re still paying off a loan? We’ve compiled a list of tips to follow and consider before buying a home, or if you’re looking to better your financial situation on an already purchased property.
Plan to pay at least 20% of your down payment when you purchase your home. Otherwise, the lender will probably make you buy mortgage insurance which is an unnecessary expense you want to avoid. This occurs because the lender wants to be protected in case you default. In addition, a larger lump sum upfront will lower your overall interest rate, which means you start to pay off your principal repayment sooner rather than later.
If you bought a home with a spouse, there’s already a good chance you determined whether to apply together based on both of your credit scores. Now that you’re paying off a mortgage, consider dedicating one salary solely to paying the mortgage. As long as both of you can live off of one salary, this is a great way to quickly pay the loan. This may require a more frugal lifestyle, but the payments will decrease at a much faster rate.
You might be itching to buy a home immediately, but unless you can pay off substantial mortgage payments, it might be best to wait. The alternative is making larger mortgage payments; the faster you can pay off your loan, the less interest you pay, which means you save money over time. Shorter loan terms are better for building equity, and this typically lowers your interest rate too. With this in mind, consider a 15-year home loan rather than the standard 30-year loan.
This is another solution for paying less interest over time. Bi-weekly payments typically come out to 13 payments in a year rather than 12. One home expert says in the case of a $250,000 home with 4% interest on a 30-year payment plan, the borrower would save almost $30,000 in interest charges and have the loan paid off in five fewer years.
Make sure your lender offers legitimate bi-weekly payment offers. Otherwise, they might use a third-party processing company that would charge extra, or they might just be holding onto your bi-weekly payments to make a monthly payment which defeats the purpose of saving money on interest. To avoid this problem, you can also make an extra payment at the end of the year by building up your own savings in an extra savings account.
Refinancing sounds great in theory since the goal is to lower your interest rate, but sometimes it involves more trouble than triumph. Refinancing your home is a big commitment because it’s a new mortgage. If you’re a new homeowner but you don’t see yourself living there in the long-run, you’ll only be prolonging your debt on a house you’re not 100% invested in keeping.
Refinancing might be a great solution for you, but make sure you thoroughly do your research first.
When remodeling, choose projects with the highest ROI. You may think a big kitchen update is the best choice, but in reality you might lose a lot of money on the investment, especially if it requires taking out a loan.
Try to focus on projects you can pay out of pocket and start small. For example, changing faucet fixtures, the front door or adding an eye-catching chandelier. Rather than trying to get new cabinets or floors, hire a resurfacing company. Or create an extra bedroom in a den or office space by adding a closet system for less than $1,500.
Always address maintenance issues right away like leaks, breaks, or deteriorating foundations. If you’re not a savvy do-it-yourself expert, hire a general contractor, plumber or electrician to inspect your home for a couple hours. Such services cost money, but it’s worth it in the long-run if they notice a severe problem.
There are plenty of tricks to the trade to improve your home equity. But first, make sure you do your homework when it comes to altering your payment options or adding updates to your space.