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Writer's pictureThe Madrona Group

Millennials and Young Homeowners Guide To Building Home Equity

Owning a house and having good credit at the same time? In this economy?

What if we tell you it’s possible? It’s common for young people—those who are below 35 years old (also known as millennials)—to complain about not having money. And typically, they attribute their woes to a poor economy.

What people don’t know is that they can actually create wealth through homeownership! How? It isn’t exactly free money, but it’s almost just as easy. You’ll just have to use this guide to building home equity.

Home Equi-what?

Equity, specifically home equity, pertains to how much of the property you actually own. This is usually expressed in percentages, and is basically how much of the property’s selling price you’ve already paid for.

If you just bought a home, for example, you’ve probably made a down payment. If this down payment is 5% of the seller’s price, your current home equity automatically becomes 5%.

If you’ve owned the property for a while, you may calculate home equity by subtracting any outstanding home loans you have from the property’s current market value.

So where’s the additional wealth? After paying your down payment, you still have to pay off the property’s outstanding balance. This means that you have time to increase the value of your property, and even improve your credit while doing so.

GUIDE TO BUILDING HOME EQUITY

Unlike debt and other expenses, as a homeowner, an increase in home equity is a good thing. Why? Because you are improving your credit through the home’s market value, your diligence is paying for your mortgage, and you’re gaining true ownership of your home.

Here are some ways that home ownership can create wealth for you:

1. Appreciate Your Home

And we’re not just talking about your sentiments towards your home. This refers to ways you can increase your property’s worth.

Like they say, buying a home is an investment in itself.

a. Rising Home Prices

Before you even buy a home, check the surroundings. Is it accessible? Are there upcoming developments in the area? Is the market doing well? These factors can increase your home’s market value effortlessly, consequently affecting your home equity.

b. Home Improvements

If you can, try upgrading areas of your property! Consider adding a shower in the downstairs bathroom, installing a newer stove and fridge, or maybe even planting some trees on your property line.

While these improvements may cost you some, they benefit you by increasing your home’s property value.

c. Home Maintenance

This simply means preserving the home’s livable condition, as you normally would.

A few tips include having regular repair checks on the house and around your property, and preserving unique features, like outdoor decks.

2. Mortgage Payments

Mortgage payments are no fun, but this expense can ultimately help you create wealth.

For starters, it is important to know that the larger your outstanding loan balance is, the greater amount of interest you pay on it. However, don’t worry; we’ve listed a few ways you can avoid this.

a. Make a Larger Down Payment

Even before you can call a property yours, you can start creating wealth by preparing a bigger down payment.

Home property down payments can be as low as 3%. But as previously mentioned, a higher loan balance means more money paid towards interest in the end. It’s also important to note that once you hold 20% equity in your home, you start saving on the cost of private mortgage insurance.

This can be an attainable goal for you, but you don’t have to pay for the whole 20% right away. Just consider a slightly higher down payment.

For example, saving for a 5% down payment instead of a 3% one gets you that much closer to that 20% home equity target.

b. Shorter Mortgage Terms

This is tricky because this requires higher payments compared to a long-term mortgage. But if you budget wisely, this is a sure way to build home equity quickly.

c. Bi-weekly Payments

If the above is too taxing, look into making mortgage payments every two weeks, rather than once a month.

The difference? This can result in your 30-year mortgage transforming into a 25-year mortgage. This is because your 12 monthly payments paid annually turns into 13 monthly payments per annum.

d. Regular Payments

If your budget won’t allow for this, then simply make sure to pay your mortgage on time. This will keep your credit positive, and you’ll gain equity in your home with every payment.

In fulfilling these kinds of commitments, it is up to you to strike a balance between your monthly budget and savings. See what works best for you, so that you can create wealth as a homeowner, by making the most of your home equity.

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