When buying your first home, you may not be thinking about building equity. After all, you have your hands full with the Chicago home search, the mortgage approval process and myriad closing details. Future equity doesn’t seem as important.
Yet the perfect time to consider equity is when you are choosing your home. In case you’re unfamiliar with the term, equity is the difference between what you owe on the home, and what it is currently worth on the market. If you choose your home wisely, and have a decent down payment, you’ll have an easier time building equity.
Your equity position matters for several reasons. If you want to borrow against your home value, you can take out a “home equity loan.” But most lenders only allow you to borrow against a percentage of your equity – anywhere from 50% to 80%.
If you want to refinance your home in the future, the lender will consider your equity ratio. The more equity you have, the less risk you pose to the lender. Your equity position can affect the interest rates you are offered.
When you sell your home, your equity basically translates into the proceeds you’ll receive at closing, minus your transaction expenses. If you have little or no equity in your home, it may be difficult to afford to sell. And if you are “underwater” in your equity – meaning you owe more on your home than it’s worth – you’ll need the approval of your mortgage lender to sell the property at a loss.
Your equity position is first established when you buy your home. If you have a down payment of 20%, you’ll have 20% equity in your home right off the bat. The more money you put down at purchase, the larger your equity stake.
If you buy a home that needs some work, and you make quality repairs and upgrades, you could significantly improve the market value of the property, and therefore improve your equity. This is exactly what “home flippers” do all the time. Yet too few buyers recognize these opportunities, and instead pay top dollar for a renovated home. If you’re willing to do the work, you could be enjoying the profits when it’s time to sell!
You can also improve equity by paying down your mortgage. Making extra payments towards the principal balance of your mortgage reduces your indebtedness, which improves your equity ratio.
In most cases, home values tend to improve over time, though this cannot be guaranteed. You could potentially do nothing (other than make your regular mortgage payments) and see your equity grow as home prices rise.
The best recipe for improving your equity is a combination of all the above! If you buy a home wisely, put some practical upgrades in it, and pay down your mortgage debt, you will absolutely thank yourself in the future. Any gain in value that comes passively through market appreciation is frosting on the cake.
StartingPoint Realty – your first-time home buyer specialists!
StartingPoint Realty proudly serves first-time home buyers throughout the Chicago area. Get an introduction to home buying by attending our free home buying seminar! There’s no sales pressure and no obligation. Space is limited, so please register your choice of location and date to reserve your seat!
Always feel welcome to contact us for help with your Chicago home buying questions!
Ryan Gable Broker/CEO Starting Point Realty
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