November 19th, 2018 5:04 AM by Jackie A. Graves, President
Want to create wealth through homeownership? Build equity.
is the percentage of your home’s value that you own, and it’s key to building
wealth through homeownership. Let’s take a closer look at how to build home
equity without blowing your budget — and how to access it when you need
easy to calculate when you first buy a home because it’s basically your down
payment. For example, if you put $11,250 down on a $225,000 home, your down
payment is 5 percent and so is your equity.
From 2016 to
the first quarter of 2018, most first-time home buyers in the U.S. started with
about 7-percent equity, according to Inside Mortgage Finance. This is
encouraging because it shows you don’t need to spend years saving for 20
percent down or more before you buy. Repeat home buyers started with more
equity, at about 17 percent.
Here are six
ways your home can create wealth for you. Some require time, money — or both. A
lender can help you decide what works best for you.
through appreciation can take little time or a lot, depending on the market.
With home prices going up like they have in recent years, appreciation has been
a boon for many home owners.
research indicates that the median home value grew from
$185,000 in April 2016 to $216,000 in April 2018. If you bought a home for
$185,000 in April 2016 with a down payment of $12,950, your beginning 7-percent
equity would have grown to 23 percent by April 2018.
this by subtracting your current loan balance ($165,600) from your home’s
current value ($216,000). Then we divide the difference by your home’s current
value. One-eighth of this additional 16 percent equity is from paying down your mortgage, and
the rest is market appreciation.
If you waited
two years and bought the same home in April 2018 with a 20-percent down payment
of $43,200, you started off with 20-percent equity. You also used 3.3 times
more cash to make the purchase. And here’s the kicker: Your total monthly housing cost would
be the same — about $1,050 in both cases.
illustrates two things:
power of home appreciation. It’s a lot like buying stock and benefitting as its
value goes up. But there’s also a difference: While you’ll pay capital gains on
rising stock value, you’re exempt from paying taxes on primary-home capital
gains up to $250,000, or $500,000 for married couples.
waiting to “save enough” isn’t the primary factor in determining if you can
afford to buy a home. When it comes to qualifying for a loan, lenders do indeed
look at your down payment. They’ll also want to know how much you’ll have in
cash reserves after closing. But there are lots of options
for low down payments that require minimal reserves.
budget is the primary factor lenders consider when deciding whether you can
afford a home. Lenders will allow you to spend between 43 percent and 49
percent of your income on monthly bills, which is actually on the high side and
could strain your budget.
most first-time buyers have spent about 38 percent of their income on housing
and other debt, which is a pretty safe cap for budgeting.
You can do
this but, as we’ve seen, waiting to save extra cash can go against your broader
financial interests if you lose the chance to build equity through
appreciation. Therefore, you must strike a balance among down payment, monthly
budget and savings for other priorities. A good lender can provide rate and
market insight to help you do this.
advantage of work bonuses, family gifts and inheritances to pay down your
mortgage. If you do pay down in lump sums, see if your lender will recalculate
(or “recast”) your payment based on the new, lower balance.
payments every two weeks instead of once a month. Over the course of a year,
this will add up to 13 monthly payments instead of 12. You’ll build equity
faster and shave five to six years off a 30-year mortgage. Just make sure your
lender isn’t charging extra for processing semimonthly payments.
Take out a 15-year
mortgage instead of a 30-year mortgage, and you’ll build equity
twice as fast. Two caveats here: You’ll have a significantly higher monthly
payment and, because of that, you may have a tougher time qualifying.
appliances or cosmetic features like paint are unlikely to increase value. Only
big improvements like new kitchens, or additional bathrooms or other rooms will add meaningful value. Make sure the cost of
such improvements will create the added value you’re looking for.
borrow or sell your home to use your equity. The three most well-known ways to
get to your equity through borrowing are a home equity line of credit (HELOC),
home equity loan or cash-out refinance. Compare
the pros and cons of each.
rising right now, so these borrowing options might cost more in the future.
Talk to your lender to determine the best approach for you.
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