How to Build Home Equity?
How to Build Home Equity?
Building home equity is more or less the sheer essence of purchasing and owning real estate. Most people will tell you that real estate is one of the best investments that you can make. Historically, real estate outperforms most other investment options and is easy to leverage when the time comes. Also, liquidity isn’t much of a concern, there are submarkets in all parts of Ontario including rural areas. If you are curious about how to build up home equity you might find one or more of the following tips helpful.
What is Home Equity?
Home equity is the difference between the property value and any encumbrances registered against the title of your property. For example, if your home is valued to be worth $500,000, and you have a first mortgage of $350,000, you have $150,000 of home equity. Arguably this is before real-estate commissions and closing costs, but, you get the gist.
Increase Your Down Payment
This might strike you as obvious, but worth mentioning nonetheless. Naturally, you will be off to a head start putting down a 25% down payment as opposed to a 5% down payment. Albeit, it might be difficult to come up with a larger down payment when you are first entering the market. While you can purchase a home in Canada with a downpayment between 5% – 19.99%, these mortgage loans must have mortgage default insurance. Mortgage default insurance premiums vary based on the size of the down payment and the loan-to-value. Also, keep in mind that the default mortgage insurance premium will be added to your principal balance and amortized over the life of the loan. For instance, if you were applying a 5% downpayment to purchase a home worth $450,000, your mortgage of $427,500 turns out to be $444,600. Providing a larger down payment will not only provide you with a head start but also paying down a smaller mortgage.
Home Renovations & Improvements
We should start by mentioning that home improvements aren’t always a dollar-for-dollar return. In other words, injecting $50,000 into your home may not necessarily increase the fair market value by $50,000. There is always a layer of love and subjectivity when it comes to homeowners and the value of their homes, we understand. However, renovating your basement, or tackling deferred maintenance is usually always a sure way to bring your home to max value potential, and or increasing the property value. It is very common to put off minor improvements, and sometimes the cost doesn’t seem quite worthwhile. Just keep in mind that when it comes time to sell, these issues will be addressed and will likely result in a reduction from the sale price. For those with the available cash on hand, it might make sense to tackle the work and enjoy the fruits of your labour while living in your property. On an ending note, we should add that it is important to work with reputable tradespersons and obtain multiple work quotations.
Exercise Your Mortgage Prepayment Privilege