The equity in your home is simply the difference between the amount you owe (on the mortgage principal) and the market value of your home (as determined by a professional appraisal).
home value - mortgage balance = home equity
There are two basic ways to build equity in your home. You can reduce the mortgage principal, and you can increase the market value of your home.
Reduce the Mortgage Principal
1. Begin with a large down payment: Down payments required by lenders are typically in the range of 3.5%-20%. By paying a larger percentage upfront you are increasing your equity immediately. You might choose to make an even larger down payment because the less you borrow the more equity you will have upfront.
2. Monthly mortgage payments: Making your monthly mortgage payments will build equity in your home, but only with respect to the principal portion of your payment. Generally, at the beginning of your mortgage loan repayment, a higher percentage will be paid toward interest on the loan (when your principal is high). You will want to keep track of your principal and interest (and understand that some mortgages will include property tax and insurance). The amount you pay in principal on your mortgage is the amount that will contribute to building equity.
3. Make additional mortgage payments: You can pay more each month, or make additional mortgage payments. Just be certain your lender understands you want the additional money applied to the principal. You will also want to check with your lender and understand any mortgage prepayment penalties that may be part of your loan (this is best done while shopping for a loan).
4. Choose a 15 year mortgage: You won’t necessarily be paying twice as much on your monthly mortgage payment when you choose a 15 year mortgage versus a 30 year mortgage. Run the numbers. There are advantages. If a 15 year mortgage is a viable option, you will be paying less interest over the course of the loan and effectively build equity in your home much faster.
Increase the Market Value of Your Home
5. Home Improvements: Major and minor renovations can have a significant impact on increasing the market value of your home. Bathroom and kitchen remodels remain high on the list, as do the tried and true and low cost home improvement of a fresh coat of paint! Working with a real estate professional is always a good idea when considering which home improvement projects will provide the highest ROI in your market.
6. Time: Generally speaking your home will increase in value over time as demand for housing increases, the need for land increases, the market value of other neighborhood homes increases, and economic trends increase. Of course, all these factors can work in the other direction decreasing the value of your home. Sometimes you will have to wait for the tides to turn. During a cold market, you are best advised to wait before you sell your home. The market will likely improve in your favor. Patience will serve you well, as will working with a trusted real estate agent from Coldwell Banker Classic Properties. The agents understand local market trends and will work in your best interest when you choose to list your home in Central Vermont.
We look forward to helping you with your real estate needs in Central Vermont. Contact Coldwell Banker Classic Properties today!