It's fulfilling to say goodbye to your landlord and move into your own home. Homeownership brings independence and privacy. More importantly, homeownership can be the ticket to wealth building that you miss out on as a renter.
Equity is how much of the home that you actually own. This is usually calculated by subtracting what you still owe on your loan balance from the market value of your home.
As a renter, your monthly payments go to your landlord, never to be seen again. However, as a homeowner, your mortgage payments are an investment in your home. This is a significant asset as it contributes to your personal net worth, whether you have a mansion or a mobile home.
Increasing your home equity also means possessing a financial safety net for any expenses that pop up in your future.
For example, the equity in your home can be used as a down payment
for another home. You can do this by using your home equity for a home equity loan or home equity line of credit (HELOC)
, also known as a second mortgage).
A home equity loan is a loan that is secured by your home and is disbursed as a lump sum for the total amount of equity that you have. This means that your home can be taken by the mortgage lender if you default.
On the other hand, a HELOC is more like a credit card that accesses the equity in your home.
Why buy a home?
The financial benefits of homeownership over renting are clear. But for first time home buyers in the middle of an affordable housing shortage, owning a home seems aspirational at best and impossible at worst.
If you are looking to avoid the fees that come with private mortgage insurance, you need a down payment that is 20% of the home's cost.
Fortunately, with the Unison HomeBuyer program
, you only need to save up 10% of the down payment—and in some cases, as little as 5%. Unison will pitch in the remaining 10-15% to help you avoid PMI
and get a better mortgage rate.
With Unison, there are no monthly payments, and Unison is paid from a portion of your home's appreciated value when you sell in the future, up to 30 years later.
How can I build home equity?
There are two ways to increase your home equity:
- Increase the property value of your home.
- Decrease the amount owed on your loan.
How do I increase my property value?
1. Make home improvements.
Upgrading your kitchen counters may feel like a splurge when you're trying to pay off your mortgage, but improvement projects can increase your home's value.
It is just as important to invest in the regular maintenance of your home as it is to remodel or make improvements. A beautiful new kitchen isn't going to do much for your equity if the roof is leaking. Routine repairs aren't very fun, but they are crucial to building equity.
Regular lawn care is also important, especially if you plan on selling your home. Potential buyers are interested in your home's good bones, but curb appeal can seal the deal.
Overall, keeping your home up to date with maintenance and upgrades increases your home's market value, which makes it easier to sell.
2. Get involved in your neighborhood.
Taking an interest in your community is a great way to boost your home's value in the long term. Home buyers are looking for a place to call home, and that includes the community where their real estate is located.
Whether your involvement takes the form of being neighborly or getting involved in your local government, building a coveted community is a great way to boost property values in your neighborhood and create equity in your home.
How do I decrease my debt?
1. Choose a 15-year mortgage over a 30-year mortgage.
Monthly mortgage payments may be higher with a 15-year-mortgage, but the trade-off is a lower interest rate. This means that you will pay less for more equity in the long run. The shorter term also means that you will build equity more quickly. If you already have a 30-year loan, don't sweat!
Refinancing is an option that can be arranged by your mortgage lender.
2. Make extra payments.
If you know that you have a bonus coming in December or always get a crisp $50 from your grandma on your birthday, put it towards your mortgage. Every bit of extra money counts when it comes to paying down your home loan.
If you're living alone with space to spare, renting out a bedroom is a great way to get some extra money to contribute towards your monthly mortgage payment. Being a landlord is not quite as straightforward if you don't plan on living in the home that you own. Lenders generally ask whether your home is being used as a primary residence because the loan is less likely to go into default.
The representations that you make to your lender can affect your interest rate, and can make you liable for fees or penalties if you aren't truthful on the mortgage application.
Occupancy is something mortgage lenders will confirm in person or over the phone, so honesty is always the best option. Your credit score will thank you later.
All in all, increasing your equity and decreasing your debt can be a mostly passive activity. Both will likely happen if you simply keep up with your mortgage payments. But if you take an active approach, you can more quickly maximize your equity and eliminate debt, putting you in a better overall financial position.