A house, no matter how big or pretty it is, has no real value without equity. It is the difference after the debt that needs to be paid for is deducted to its market price. When expressed in a percentage, it represents how much home ownership you truly have.
When applying for a Utah housing loan in Ogden, Provo, Sandy or Salt Lake City, home equity should be top of mind. Otherwise, your mortgage may sink underwater, and you may lose your property to foreclosure in case of a housing crisis.
The good news is that you can build equity on your property consistently, as long as you do not miss your mortgage payment. But the bad news is that it does not grow at a universal rate. Below are the most effective ways to build home equity fast to passively grow your wealth more quickly.
Buy in a Developing Market
A location where home prices are still relatively low but are on track to increase soon is a good place to buy a house. Such a community aids equity building through property appreciation.
Check out the economic trends in different areas to predict which real estate markets are bound to grow in the near future. An increasing number of business is a surefire driver of economic growth.
Make a Fat Down Payment
Your down payment automatically becomes home equity. A small one can reduce the rate of return through appreciation, but a large one serves as a buffer in case home prices decrease.
The ideal down payment is 20%, but it can be difficult to produce. One way to come up with such an amount is to choose a less costly house. Another way is to use other funds to beef up your finances. A gift from a qualified donor, like a spouse, can be used to increase your down payment. Most lenders do not allow a down payment to be sourced exclusively from gifts, so ask about the minimum borrower contribution.
Take Out a 15-Year Loan
A loan with a short term helps you build home equity fast because it takes less time to pay off. Since you are likely to get a much lower interest rate with a 15-year mortgage, more of your monthly payment will go toward the principal balance.
The same concept applies to adjustable-rate mortgages except that they come with 30-year terms. Hybrid ARMs are usually associated with lower mortgage rates, so applying for one can help you build equity on your property quickly during the “fixed” period.
In general, payments made between due dates directly cut down the principal. If you earn extra cash in dribs and drabs, using it on your property is a wise way to spend it.
Not all lenders have a friendly prepayment policy, so ask yours if it is an option. When extra payments are allowed without penalties, check your monthly statement to make sure they are credited accordingly.
You may not be an investor, but you have to think like one to protect your property from the consequences of housing market bubbles. You may not want to turn your home equity to cold cash, but it is still part of your wealth, so increase it as fast as possible.