Owning a home may be your single largest investment. Yet the value of this investment depends on the amount of equity you build, how well you maintain your home and whether you take steps to improve its function and appearance.
What is home equity?
Home equity refers to the current market value of your home minus the amount you owe on the mortgage. You gain home equity when your property’s market value goes up, but you also gain equity by steadily paying off your mortgage.
Building equity through payments
You will build equity in your home by making regular mortgage payments (unless you have an interest-only loan). There are also ways you can pay the principal off more quickly:
• Make larger payments – If you can afford to make larger mortgage payments, you can include an additional amount to be paid toward the principal. This can be done with each payment or whenever you choose to make a larger payment.
• Switch to bi-weekly payments – A bi-weekly payment plan lets you pay half of your mortgage payment every other week instead of paying the full amount once a month. Over the course of the loan, you end up making more frequent payments and paying off the loan more quickly.
Refinancing for better terms
At some point in the life of your mortgage, you may want to consider refinancing for better terms. You don’t want to do this too often, as each time brings more closing costs, but there are situations where refinancing can help you build equity more quickly:
• Lower your interest rate – You may be able to secure a lower interest rate if the market changes or your credit score improves. This means lower monthly payments and less interest paid over the life of the loan. It can also free up cash to put toward paying the principal more quickly.
• Shorten your mortgage – A shorter-term mortgage (e.g. 15-year instead of 30-year) with a lower interest rate lets you build equity more quickly as a larger portion of the payments will go toward the principal.
• Change an adjustable rate – If you have an adjustable-rate mortgage (ARM), the interest rate can change over time. Refinancing may let you get a new ARM with a better initial rate.
Home improvements with big returns
You can invest in your home by keeping up with its maintenance and making improvements which are likely to increase its market value. Do your homework to find out which improvements are likely to have the biggest return on your investment. While there are no guarantees, there are some upgrades that are frequently recommended:
• Kitchens and bathrooms – Kitchens and bathrooms are some of the most frequently used rooms in the house and upgrades can bring big returns. Consider improvements like granite countertops, tile floors and high quality appliances and fixtures. Opt for timeless styles instead of passing trends to make your investment last.
• Interior and exterior additions – Increasing the size of your home is often a great investment whether you build an interior addition or extend the outdoor living area with a deck, patio or screened porch. Just be careful to keep the size of your home in line with your neighbourhood, as it can sometimes be harder to sell the biggest house on the block.
• Maintenance and curb appeal – Minor updates like fresh carpet and paint can go a long way toward improving the value of your home. Be aware of your home’s curb appeal as well. The look of your home’s exterior can have a big impact on its overall value.
Tapping into your home equity
Building home equity gives you more options when you are in need of cash. You may want to tap into your home’s equity to help pay for your children’s college education, unexpected home repairs or home improvements. A home loan may also let you consolidate debt. There are options when it comes to accessing your home equity, such as:
• Home Equity Line of Credit (HELOC) – A HELOC is a line of credit which uses your home as collateral. You will be approved for a certain amount of credit depending on your home equity. The HELOC will have to be paid off when you sell your home.
• Cash-out refinancing – Refinancing for an amount that is more than what you owe on your home lets you receive a cash payment for the difference. Doing this will lower the amount of equity you have in your home.
Whether you are looking for ways to build equity in your home or receive cash against your home’s value, the experts at Embrace Home Loans can help you find the right option to meet your needs.