How Buying Your First Home Can Lead Build Home Equity

Build your home equity. Build your future

Hey there, future homeowner! Becoming the proud owner of your first home not only means settling into a community but also taking your first step toward building home equity. As you run the numbers on renting vs. buying, let's dive into how building home equity can turn your investment into an asset!

What Is Home Equity?

Home equity is the difference between your home's value and the remaining balance on a mortgage. Suppose in the future, your home is worth $250,000 and you have $150,000 left on your mortgage, your home equity would be $100,000. You can find your potential home equity with this simple equation:

Home Value – Remaining Mortgage Principal = Home Equity

As you pay off your mortgage and your home's value changes, your home equity will change as well. Once your mortgage is fully paid, you'll have 100% home equity.

How Does Home Equity Work?

Home equity is the portion of your home's value that you own outright. If you plan to make a $17,000 down payment, you would have $17,000 in home equity when you close on your mortgage. From there, your equity will grow over the life of your loan. Wondering if it's possible to increase your home equity? Absolutely! In fact, a CoreLogic report stated that homeowner equity increased by $1 trillion from the end of 2021 to the end of 2022. That could be you some day! Building substantial home equity takes time, so keep a long-term mindset.

5 Ways To Build Home Equity

Building home equity is a gradual process, but there are steps you can take to speed things up. Here are five approaches to consider as you house hunt:

  1. Increase your home's value. Home improvements may increase your home's value, thereby boosting your equity, so it may be worth considering a fixer-upper. Many lenders offer special renovation mortgage options to make the process easier.
  2. Make a larger down payment. Your initial home equity amount equals the percentage you pay for a down payment. A larger down payment means higher initial equity. If there is room in your budget, talk to your lender about whether a larger down payment could be right for your loan.
  3. Pay a little extra. Once you’ve gotten used to homeownership, consider putting extra money towards your mortgage principal to build equity faster. This doesn't necessarily mean making a full extra payment. You could round up to the nearest hundred or make an extra half payment. The key is to stay within your budget. Use an extra payment calculator to see how paying a little extra could benefit future you.
  4. Ditch PMI. If you plan to make a down payment that is less than 20%, chances are you might have private mortgage insurance (PMI) on your loan. Luckily, it doesn’t have to stay there forever. Once you've built up 20% in home equity, talk with your lender about your options regarding PMI. With the monthly insurance premium removed, you could put the extra towards your mortgage principal.
  5. Make biweekly payments. Did you know that you can make more than one monthly mortgage payment? Splitting your monthly payment into two biweekly payments can help you pay off your mortgage early. This way, you'll effectively make an extra payment over the course of the year, which could save you on interest in the long run.

Why Is Home Equity Important?

You might wonder what the big deal is about home equity. We’ll tell you. The main reason is that home equity is a path to building wealth. Plus, if you plan on living in your first home for the foreseeable future, you could borrow against your home’s equity should you ever need to consolidate high-interest debt or cover unexpected expenses.

As you search for your first home, it is important to understand why home equity matters now so that you can set yourself up for success in the future. Talking to a mortgage professional can help you learn just how equity can benefit you.

Protecting Your Home Equity

When you’ve established yourself in your new home and work to build your home equity, it’s essential to protect your investment. Here are some ways to safeguard your home equity:

  • Stay on top of maintenance. Regular home maintenance is crucial in preserving your home’s value. Tackle small repairs as they come up, and schedule routine maintenance to avoid costly issues down the line.
  • Keep an eye on the market. You’re probably paying attention to the housing market while you shop for a home, so keep it up once you get a mortgage. Understanding market trends can help you make informed decisions about when to invest in improvements.
  • Consider refinancing. When the time is right in the future, refinancing your mortgage at a lower interest rate could potentially save you money and help you build equity faster. Speak with a mortgage professional to determine what is the best choice for you.
  • Choose upgrades wisely. When renovating, focus on improvements that will increase your home's value. Consult with a professional to identify which upgrades are likely to yield the best return on investment.
  • Insure your home. Adequate home insurance is critical in protecting your home equity. Make sure your coverage is up to date and sufficient to cover potential damages or losses.

Building and maintaining home equity is a long-term commitment. By following these tips and strategies, you may be well on your way to turning your first home into a valuable asset. Remember to consult with mortgage and real estate professionals along the way to make the most of your investment.

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