Do you want to create a sizable amount of wealth through homeownership? You need to build equity.

Put simply, home equity is the percentage of your home’s value that you own, and it’s key to building wealth through home ownership.  Here we will discuss how to build equity in your home without blowing your budget — and how to access it when you need it.

How much equity do you have?

Equity is easy to calculate when you first buy a home because it’s basically your down payment. For example, if you put $11,250 down on a $225,000 home, your down payment is 5 percent and so is your equity.

According to Inside Mortgage Finance, from 2016 to the first quarter of 2018, most first-time home buyers in the U.S. started with about 7-percent equity. This is encouraging because it shows you don’t need to spend years saving for 20 percent down or more before you buy. Repeat home buyers started with more equity, at about 17 percent.

How to build your equity

We list six of the top ways your home can create wealth for you. Some require time, money — or both.   Your best course of action when making this decision is to contact a reputable local lender who can then help you decide what works best for you.

1. Let your home appreciate

Building equity through appreciation can take a little or a lot of time, depending on the market where you live. With home’s appreciating much as they have been in various markets these past several years homeowners have been ecstatic to see their home values rising right along with it.

Zillow research indicates that the median home value grew from $185,000 in April 2016 to $216,000 in April 2018. Therefore, if you bought a home for $185,000 back in April 2016 with 7-percent down payment of $12,950, then your beginning equity would have grown to a whopping 23 percent by April 2018.  And the Shreveport Bossier City market has been one of these fast growing markets!

In this scenario, we get this number by subtracting what would be your current loan balance ($165,600) from your home’s current value ($216,000).  We would then divide the difference by your home’s current value. One-eighth of this additional 16 percent equity is from paying down your mortgage, and the rest is market appreciation.

However, if you waited two years and bought the same home in April 2018 with a 20-percent down payment of $43,200, you would then start off with 20-percent equity.  But you also would have used 3.3 times more cash to make the purchase. But here’s the funny thing: Your total monthly housing cost would be the same — about $1,050 in both cases.

This example illustrates two things:

First: It shows the absolute power of home appreciation. It’s a lot like buying stock and reaping the benefits as its value rises. But there’s also a difference to be aware of:  With stocks you’ll end up paying capital gains on the increased stock value, you’re exempt from paying taxes on primary-home capital gains up to $250,000 for a single individual or $500,000 for married couples.

Second, waiting to “save enough” isn’t the primary factor in determining if you can afford to buy a home. When it comes to qualifying for a loan, lenders will of course look at your down payment.  But they will also want to know how much you’ll have in cash reserves after closing.  And there are lots of options for low down payments that require minimal reserves.

The primary factor lenders look at is your monthly budget when deciding whether you can afford a home.  A lender will allow you to spend between 43 percent and 49 percent of your income on monthly bills, which is actually on the high side and could strain your budget.

Since 2016, most first-time buyers have spent about 38 percent of their income on housing and other debt, which is a pretty safe cap for budgeting.

2. Make a larger down payment

You can do this but, as we’ve seen, waiting to save extra cash can go against your broader financial interests if you lose the chance to build equity through appreciation. Therefore, you must strike a balance among down payment, monthly budget and savings for other priorities. A good lender can provide rate and market insight to help you do this.

3. Use financial windfalls

A good idea is to take advantage of additional unexpected monies received above and beyond your expected pay: work bonuses, family gifts and inheritances can be used to pay down your mortgage. If you do pay down in lump sums, see if your lender will recalculate (or “recast”) your payment based on the new, lower balance.

4. Make biweekly payments

Make mortgage payments every two weeks instead of once a month. Over the course of a year, this will add up to 13 monthly payments instead of 12. You’ll build equity faster and shave five to six years off a 30-year mortgage. Just make sure your lender isn’t charging extra for processing semimonthly payments.

5. Cut your loan term in half

If you can try to take out a 15-year mortgage instead of a 30-year mortgage.  Doing so will help you build equity twice as fast. A few things to note on this:  You’ll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying for it.

6. Make home improvements

Look to create meaningful value with big improvements like a new kitchen, additional bathroom or other room additions.  New appliances or cosmetic features like paint are unlikely to increase value. Just make sure the cost of such improvements will create the added value you’re looking for.

How to use your equity

You must borrow or sell your home to use your equity. The three most well-known ways to get to your equity through borrowing are a home equity line of credit (HELOC), home equity loan or cash-out refinance. Compare the pros and cons of each.

Rates are slowly rising right now, so these borrowing options might cost more in the future. Talk to your lender to determine the best approach for you.

**Ryan Wheeler is an expert real estate agent and military veteran serving buyers and sellers of homes in the Shreveport-Bossier City area.  Connect With Me Here

Adapted from an article located here

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Are you a first time home buyer? With so many choices to make and so much at stake, it’s essential that you prepare. For advice, check out the First Time Home Buyer Guide from realtor.com® to learn the 10 steps to purchasing your first home without a hitch.

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Step 1: How to Improve Your Credit Score

Pull your credit report

Experian, Equifax, and TransUnion are the three major U.S. credit bureaus and each releases its own credit scores and reports (a more detailed history that’s used to determine your score).  Although they do pull from different sources their scores should be about the same.  For example, Experian considers on-time rent payments while TransUnion has detailed information about previous employers.

To access these scores and reports, financial planner Bob Forrest of Mutual of Omaha recommends using AnnualCreditReport.com, where you can get a free copy of your report every 12 months from each credit-reporting company. It doesn’t include your credit score, though—you’ll have to go to each company for that, and pay a small fee. Fee’s tend to range in the $25-$40 range.

Or you can check with your credit card company: Some, Capital One and Discover offer free scores and reports.  Once you’ve got your report, make sure to review it carefully, particularly the “adverse accounts” section that details late payments and other slip-ups.

Assess where you stand

Remember the better your credit history, the higher your score will likely be which means the better your ability to get a home loan. The Federal Housing Administration requires a minimum credit score of 580 to permit a 3.5% down payment, and most lenders will require at least a 620, if not higher, credit score. So what can you do if your credit report is in less than tip-top shape? Don’t worry, there are ways to clean it up.

How to improve your credit score with error disputes

A Federal Trade Commission study in 2013 found that 5% of credit reports contain errors that can negatively impact your score. So if you see anything, you can start by sending a dispute letter to the bureau, providing as much documentation as possible, per FTC guidelines. You’ll also need to contact the organization that provided the bad information, such as a bank or medical provider, and ask them to update the corrected data with the bureau. This may take a while, and you may need documentation to make your case. But once the bad info is removed, you should see your score bump up.

Eliminate one-time mistakes

Ok, so you’ve made a late payment or two—who hasn’t? Call the company that registered the late payment and ask that it be removed from your record. “If you had an oopsy and missed just a payment or two, most companies will indeed tell their reporting division to remove this from your credit report,” says Forrest. Granted, this won’t work if you have a history of late payments, but for accidents and small errors, it’s an easy way to improve your credit score.

Eliminate credit card balances

“A good way to improve your credit score is to eliminate nuisance balances,” says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax. Those are the small balances you have on a number of credit cards.

The reason this strategy can boost your score: One of the items your score considers is just how many of your cards have balances, Ulzheimer says. That’s why charging $50 on one card and $30 on another instead of using the same card (preferably one with a good interest rate) can hurt your credit score.

The solution to improve your credit score is to gather up all those credit cards with small balances and pay them off, Ulzheimer says. Then select one or two go-to cards that you can use for everything.

“That way, you’re not polluting your credit report with a lot of balances,” he says.

Increase your limits

One no-brainer way to increase your credit score is to simply pay off your debt. Not an option right now?  Here’s a cool loophole: Ask your credit card companies to increase your credit limit instead. This improves your debt-to-credit ratio, which compares how much you owe to how much you can borrow.

“Having $1,000 of credit card debt is bad if you have a limit of $1,500. It isn’t nearly as bad if your limit is $5,000,” Forrest says. The simple math: Although you owe the same amount, you’re using a much smaller percentage of your available credit, which shines well on your borrowing practices.

Leave old debt on your report

Some people erroneously believe that old debt on their credit report is bad.  The minute they get their home or car paid off, they’re on the phone trying to get it removed from their credit report. Negative items are bad for your credit score, and most of them will disappear from your report after seven years. However, “arguing to get old accounts off your credit report just because they’re paid is a bad idea,” Ulzheimer says.  Good debt — debt that you’ve handled well and paid as agreed — is good for your credit. The longer your history of good debt is, the better it is for your score.  One of the ways to improve your credit score: Leave old debt and good accounts on as long as possible. This is also a good reason not to close old accounts where you’ve had a solid repayment record.Trying to get rid of old good debt “is like making straight A’s in high school and trying to expunge the record 20 years later,” Ulzheimer says. “You never want that stuff to come off your history.”

Pay on time

If you’re often late with payments, now’s the time to change that. You do have the power to improve your credit score yourself. Commit to always paying your bills on time and consider signing up for automatic payments so it’s guaranteed to get done.  With all of life’s distractions having one less thing to worry about that is already setup, processed and ready to go is an excellent way to go.

Give yourself time

Unfortunately, negative items (such as those habitually late or nonexistent payments) can stay on your report for up to seven years. The good news? Changing your habits makes a big difference in the “payment history” segment of your report, which accounts for 35% of your score. That’s why it’s essential to start early so that you’re sitting pretty once you’re shopping for homes and find one that meets your needs.

Once you’ve set your credit on a better path, it’s time to tackle the next major hurdle: saving for a down payment.

**Ryan Wheeler is an expert real estate agent and military veteran serving buyers and sellers of homes in the Shreveport Bossier City area.  Connect With Me

Are you a military veteran who needs to buy a house in Shreveport Bossier City?

Closing costs are those costs and fees associate with buying a home.  However, if you are active military or a veteran you may be exempt from some costs or may be able to negotiate others if you use your VA loan benefit.

Most military members are not independently wealthy and have not saved for years and years to buy a home.  Many are cash-strapped and are forced to rent, stay on base (which is also renting) or buy a home.  Not because they want to so much as because the service has forced them to make that decision.

Given a forced decision being able to use one’s VA benefit to get a mortgage to buy your own home can be the best answer to prayer.  Eligible military borrowers who use this option can buy a new home with no down payment and no Private Mortgage Insurance payment.  However, the VA does charge a funding fee of up to 3.3% which gets rolled into the loan itself.

But borrowers of any type will still face the dreaded obstacle which is closing costs.  Like death and taxes there’s really no way out of them.  Someone will need to pay (either the buyer, seller or mixture of both).  More on that in a minute …

Closing costs are those costs outside of the mortgage that just for the business of buying or selling a house and in the Shreveport Bossier City area, can equate to about 2.5% of a $225,000 loan.  These costs include lender’s fees, taxes, insurance, and other items needed to transfer the property to the new owner.  Payment of such is required at the time when you sign the papers at the Title company.   The good news is that as a military member using their VA loan benefit you are exempt from some closing costs and have ways to manage some of the others.

How are VA closing costs different?

**Ryan Wheeler is an expert RE/MAX real estate agent and military veteran serving buyers and sellers of homes in the Shreveport Bossier City area.  Connect With Me