Building Home Equity: 6 Quick Fixes
Home equity is the portion of your property that you actually “own” and is considered a most valuable asset.
Market (Appraisal) Value - Mortgage Balance = Home Equity
For Example:
$350,000 Value - $233,000 Balance = $117,000 in Equity
As you can imagine, the more your home is worth and the less you owe on it, the better.
The Benefits to Building Equity
From the example, the $117,000 in home equity can be used as leverage when borrowing money, buying your next home, or funding your retirement. You may also have the opportunity to save money by qualifying to cancel your mortgage insurance.
Borrowing Money
Borrowing money against your home equity is relatively easy to qualify for and often offers relatively low interest rates. However, take full consideration of the risk. If you are unable to repay your loan or line of credit, your house can be taken in foreclosure since it is used as collateral.
Home Equity Loan: A lump sum that is repaid with a flat monthly payment. Interest rates are usually fixed.
Home Equity Line of Credit (HELOC): A “draw period” during which you pull funds out on an as-needed basis. Modest payments are made during the draw period and then aggressive payments are made after your draw period ends. Interest rates are usually variable.
To borrow against your equity, you will need to apply with lenders who will evaluate your credit history and your home’s market value. They will then offer a maximum borrow amount (typically 80% or less of your home’s value).
Buying Your Next Home
If you plan to move, selling your current home and putting its equity toward the purchase of a new home is a good idea. The equity amount can be used as a down payment which also lowers the total amount of your new mortgage.
Funding Your Retirement
The ability to access cash from your home’s equity can partially fund your retirement and save you from having to sell stocks or other investments during a poor market.
A reverse mortgage is available to borrowers aged 62 and older when you have equity in your home. No payback is required until you move or pass away. However, they are only a good option if you are married, plan to live in your home for the rest of your lives, and let your heirs sell the home after your death.
Canceling Mortgage Insurance
Once you have built up at least 20% equity in your home, your lender may cancel your mortgage insurance upon request.
Six Quick Fixes
Most people assume the home improvement jobs that raise equity the most are large-scale projects. However, that’s simply not the case!
When it comes to gaining equity, your home’s appraised value must be raised. That means an appraiser will determine how much buyers are willing to pay in a specific market.
Below are six quick fixes that most appraisers take into account when deciding how much your home is worth.
Energy Conservation Features: Depending on the community, items such as high-efficiency windows, solar water heaters, photovoltaic solar systems, etc. are given high value.
Minor Kitchen and Bathroom Updates: You don’t need to do a complete overhaul, but small improvements can go a long way. Replace faucets, paint cabinets, and hang new light fixtures to earn value adjustments in your favor.
Replace Flooring: New carpet or hardwood floors stand out to appraisers and can add several thousand dollars to your valuation.
Maintenance: Although not very glamourous, an appraiser often takes into account recent heating or air conditioning, septic system, and roof inspections and servicing. Keep your maintenance and records up to date!
Upgrade the Front Door: Either a new steel or wood door goes a long way with an appraiser.
Appraise the Appraisal: Check your appraiser’s credentials and look for MAI or SRA designations which are signs of his or her education and experience. Then, if an appraisal comes in lower than you expected, look for errors and also at whether you believe the comps chosen are reasonably similar to your home. If you find anything you disagree with, you can appeal the appraisal with your lender or ask for a second opinion appraisal.
How Home Equity and Homeowners Insurance are Linked
When buying a home and shopping for a mortgage, lenders require you to take out homeowners insurance to ensure that their interests are protected.
When you request a home equity line of credit, your lender may have specific minimum insurance requirements as well. Be sure to call your insurance provider to add your lender to the insurance policy.
For help making sure you have the right insurance coverage for your home, contact Insurance Center Associates today.