To understand home ownership, it is best to be aware of what home equity means. Equity is the part of your property you actually own, usually based on a percentage. There are four ways to build equity, or your ownership stake: the purchase price, down payment, reducing the principal, and simply, time.
Your down payment is the first way to gain instant equity in your home. If you put 20 percent down, your equity ownership is 20 percent. If you put down less, not only are you earning less equity, PMI, or Private Mortgage Insurance, will also be added to your monthly mortgage bill. Moving forward, you will be paying out money not dedicated to the principal, which prolongs your path to earning equity.
Buying your home below market value is another way to earn instant equity. Depending on the area you live in, this may be difficult to do. Homes typically do not sell below market unless there is an issue, such as poor condition, lack of updates or a foreclosure. To build equity after you purchase one of these homes, invest in updates and repairs to bring your home up to neighborhood standards.
PAYING DOWN PRINCIPAL
As you pay your mortgage, a smaller percentage goes toward reducing the principal while the larger piece pays off the interest. The longer the term of your loan, the longer it will take you to build equity. Work with your lender to choose an adjustable rate or fixed rate mortgage and be realistic about how long you will live in the home.
Historically, home values tend to beat inflation by one to two percentage points. This means you can expect a rise in your home’s value to average about three to five percent each year, in a normal market. When you combine payments towards a principal reduction with buying wisely, as well as caring for your home by making any necessary updates and improvements, you will build equity steadily over time.
If you have any questions about buying or selling your home in Hinsdale or elsewhere in the western suburbs of Chicago, please feel free to reach out to McCleary Group. The team will happily answer your questions regarding home equity, what you can expect from our local market and offer up referrals to lenders if needed.