How can I build up equity?
As a homeowner, it's likely you might have other real estate-related goals on your agenda. From investing in a rental property through self managed super funds, becoming debt free faster or providing for your retirement, everybody is always thinking ahead for their financial future.
One way many homeowners prepare themselves financially for the future is by building up equity in their home loans.
Why build up equity?
If you have a large amount of equity in your home loan, it opens up a number of doors to utilise these funds.
Many financially savvy homeowners look towards purchasing an investment property by using their loan equity to cover the deposit. Instead of saving up a deposit in your own time, you can simply utilise a mortgage refinance to access funds you've already got in your possession.
This can give you the opportunity to purchase an investment property much faster than in the time it would take you to save a whole deposit, while also allowing you to take advantage of market conditions.
A mortgage refinance also gives borrowers a chance to access equity to pay for alterations to their property. If moving home is not an option for you, a renovation funded by equity in your loan could definitely be of use to you.
How to build up equity
There are a number of ways to build up equity in your home loan. Ultimately, it depends on your financial circumstances and the goals you want to achieve.
Here are three strategies to keep in mind:
Make bigger repayments
The equity in your home loan grows as you make each repayment, so it makes sense to increase this amount to build up a sizeable amount in your loan.
If you can afford to add a few extra dollars to your regular repayments, you can also reduce the term of your loan and save the amount of interest you pay.
Make sure you create a budget to see if you have enough funds available to bump up your repayments. It may also be worthwhile to speak to a mortgage specialist to discuss changing the regularity of your repayments too, as there could be fees charged when you refinance.
Increase the value of your home
Loan equity is the difference between your property's value and the balance you owe on your home mortgage. Naturally, this means that if the value of your home rises, the equity in your loan will increase too.
While it might take some time for your property to see some capital gains over the years, you can make valuable additions to your home to bump up its value.
Consider performing some value-adding renovations to your home in key areas, such as upgrading the kitchen or bathroom or even building on another bedroom.
Take time to figure out which renovations will provide the most value to your home, otherwise you might find the expenses outweigh the benefits!
Make additional lump sum payments
If you've ever found yourself with a bit of spare cash in your pocket, you could put it towards your home loan to grow your equity.
This has its advantages, especially in the early stages of your home loan, as it can affect the total amount of your repayments over your loan term. By making payments to reduce your principal, you can enjoy lower interest charges in the future.
If your home loan is tied to a fixed interest rate, it might be best to speak with your lender before making additional repayments, as sometimes fees can be incurred.
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