Building Home Equity Rather Than Using It

However, if you want to keep your finances healthy, it is sometimes better to build home equity rather than squeezing it in order to obtain an inexpensive source of funds. Home equity is a measurement of your financial fitness and will be taken into account by lenders and credit bureaus when determining your qualifications.

A property's available equity increases for different reasons. Some occur without intervention and others are due to modifications made by the hand of man. The key to a successful home equity building is to let time do its work of home equity building and at the same time help it by improving your property but, and here is the key to all, avoiding using your home equity as a source of funds.

Unattended Home Equity Increases

Since equity is the difference between the value of a property and the amount of debt secured by it, the amount of equity can increase either by a boost on the property's market price or by a reduction on the amount of debt guaranteed with the property. In both cases the increase can occur without intervention of the owner of the property.

If market conditions such as a construction boom, general raises on the property's value on a particular neighborhood due to a high demand, etc. alter the houses worth increasing it, the amount of equity available on those properties will increase, thus improving the financial situations of the owners which will have a better asset to debt ratio.

On the other hand, the continuous payment of the mortgage loan secured by the property or any additional home equity loan will reduce the amount of debt secured by the asset and thus, increase the amount of available equity on the property. Such situation will also improve the asset to debt ratio and consequently, the financial stance of the owner.

Increasing Home Equity Yourself

Though home equity can increase by the sole pass of time without much intervention on your behalf other than the continued payment of your mortgage installments, it is possible to boost this increase by improving your property or by making additional payments towards your mortgage loan and thus reducing the amount of debt still secured by the property.

Making home improvements without resorting to home equity as a source of funds is feasible. You just need to go slowly and avoid hiring the services of costly professionals for tasks that you can easily do on your own. For example, even if you haven't done so before, painting your house is not a job that can only be achieved with hassles. With the proper tools, painting a medium property can be completed within a couple of days (even if you only use your spare time). The same goes to most of the rest of the tasks needed to improve a property.

Also, whenever you have some extra cash, you can use it to further repay your mortgage. This must be done only if you don't have more expensive debt to pay off which should be paid before. However, if you don't have more expensive debt, paying your mortgage loan sooner will aid you in building equity and improving your ability to obtain finance along with your credit score and history.

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Source: http://mortgage.bestmanagementarticles.com/a-43925-building-home-equity-rather-than-using-it.aspx

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