How to Build Your Home Equity

What is home equity? Most people say it is a type of loan but is it really? We are going to define what home equity is, how you can build it over time and how you can use it to your advantage. From all these, you will be able to understand the difference between home equity and home equity loan.

May 21, 2021 - 11:10

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Let us say your home is worth 40 million Kenyan shillings and you have a mortgage loan of 25 million. The difference between the home’s worth and the mortgage loan is the home equity. Home equity is the part of your home that you own after taking away the unpaid mortgage costs. In the above case, the home equity is worth 15 million.

Home equity is an asset. The faster you build your home equity, the more you gain. Some of the ways you can build the home equity include:

Paying a Good Amount for the Down Payment

Most homebuyers pay a 5%-20% down payment when purchasing a home. To increase your home equity you should consider paying a 15% to 30% down payment. With this, you have nothing to lose but more to gain. This will also help in clearing the mortgage loan faster.

But this will require cautiousness, you wouldn’t want to put all the money for the down payment and fail to raise money for the monthly payments.

Choosing a Short-Term Loan Repayment Plan

Choosing a short-term loan will make you clear your mortgage loan faster and make you pay less interest than you would if you choose a long-term repayment mortgage loan. In return, this will enable you to build the home equity in less time.

You can also accelerate the payments by paying the mortgage on a bi-weekly or weekly basis instead of once every month. To understand it better, watch this video.

Increasing Your Home’s Value

Remodeling or making some improvements to your home, makes it appreciate in value. When your home appreciates, your mortgage does not increase and so your home equity increases.

Before working on the home improvements, first, get to know the rate at which the home appreciates. There is no need to spend much money on a house that doesn’t appreciate, especially if the aim is to increase the home equity.

How can you benefit from Your Home’s Equity?

Home equity is a financial resource and you can use it to buy your next house, fund a home improvement project or even provide finances for your business. This is where a home equity loan comes in.

Home Equity Loan

A home equity loan, also known as a second mortgage, is the loan taken using the home equity as the security for the loan.

Such loans are large amounts of money given out at once. Depending on the type of equity loan and provided that the lender does not have restrictions, you can use the loan on anything. But bear in mind that your home is the collateral and if you fail to make the payments, you may end up forfeiting it.