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Building equity is one of the primary financial benefits of homeownership. You don’t notice it while it’s happening, but if all goes well, you end up with a significant asset that you can use for almost any financial need. Mortgage lenders prefer that you have at least 15% to 20% of equity built up in your home before they'll let you borrow against it. For the average homeowner, it can take about five to 10 years to build that amount of equity. If you notice suspicious activity on your credit report, file a dispute with the proper credit bureau.
Let Your Property Value Rise
The more equity you have in your home, the bigger your financial cushion if you need to borrow against it. It’s important not to go overboard when borrowing against your home’s equity. If you have difficulty repaying your home equity loan or HELOC, you do risk losing your home, just as you would if you can’t make payments on your original mortgage. For many homeowners, equity increases the longer they own their homes. As you make payments on your mortgage, the principal on the loan decreases. Home equity is simply the difference between your home’s value and the amount you owe on the mortgage.
It’s an asset that you can tap into down the road when you decide to sell, take out a second mortgage or get a reverse mortgage. Your lender will review your credit score, DTI ratio, and other financial details. Depending on the complexity of your financial situation, you may have to provide supplemental information, which can draw out the process. Your lender gives you a lump-sum payment, which you repay with interest over a set loan term. Similar in structure to your primary mortgage, this option could make sense if you don't want to refinance that loan.
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This can be good news if rates drop but bad news if interest rates are on the rise. Some states require an attorney to be present during a loan closing. If so, the closing can be delayed if you have to work around your attorney's busy schedule.
How do you figure out how much equity you have?
Making a large down payment, boosting your property value and paying more toward your mortgage every month are just a few ways to grow your equity. Conversely, when home prices drop, you might lose some equity. To help protect yourself from this type of market shift, it’s a good idea to avoid borrowing too much equity from your home.
When the lender has your application, supporting documents, and the appraisal report, an underwriter reviews everything to decide whether to approve or deny your loan application. Orchard Home Loans shops the market to find your best rates. If you'd like to gain equity faster, there are some steps you can take to speed things up. That could happen if conditions in the economy change, if buyers start to prefer homes in other neighborhoods, or if you don't keep your home in good repair. You can also take increasing the value of your home into your own hands. Home equity is the part of your home's value that you don't have to repay to a lender.
How much equity should I have in my home before selling?
When you sell your home, the proceeds from the sale first go toward paying off your mortgage balance, then you keep the rest of the money or use it to buy another home. The more equity you have, the more money you’ll make from your home sale. Just remember that you may need to pay a capital gains tax on the money you make from the sale. Building equity increases the amount of money you have in your home that you may be able to use now or in the future. You can borrow from your equity as a loan, invest it, build long-term wealth or sell your home for more than you owe and keep the difference.
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She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder. U.S. homeowners gained average $57,000 in equity in one year.
We make every effort to provide up-to-date information, however we do not guarantee the accuracy of the information presented. Consumers should verify terms and conditions with the institution providing the products. Articles may contain some sponsored content, content about affiliated entities, or content about clients in the network. However, market swings and certain economic conditions — like a recession — can cause home values to decrease. During the 2008 financial crisis, national home prices dropped by an average of 20%.
If you’re fortunate, home values in your market could increase over time without any action on your part. That’s most likely to happen in attractive neighborhoods or growing towns. So if you plan to move before five years, it may not make sense to try and tap into your home equity because you may not have established enough yet. Read on to learn more about the ways you can start building more home equity right now.
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