Tips on how to build home equity
Equity is the difference between how much you owe on your house and how much your house is worth; in layman’s terms, it is your stake in the property. Equity can be used as a future nest egg, can be used as a way to put a larger down payment on a new home, and can even be used as leverage to take out a new loan on your existing home.
Paying your mortgage every month is the easiest – and slowest – way to build equity in your home. Your home naturally builds equity if home prices in the area rise. Building equity like this often happens at a snail’s pace; however, there are a number of ways to increase the pace at which your home builds equity.
- Pay more towards your principal
Paying more towards your principal serves two purposes: it builds equity in your home and can help you pay off your mortgage faster. In fact, making one extra principal payment per year can help you pay off your mortgage up to eight years faster!
While making one entire principal payment at once might stretch the budget, there are a number of ways to pay down your principal faster. One easy strategy is to put cash from holiday bonuses or tax refunds straight towards the principal. Another is to divide an additional payment up over twelve months; if your regular monthly payment is $1,200, simply add on another $100 each month towards the principal.
- Make a larger down payment
It can be tempting for buyers to make a smaller down payment, especially if the difference seems negligible each month of the life of the mortgage. Making a larger initial down payment on a home, however, allows you to start with more equity built in as well as take out a smaller mortgage amount.
If you are refinancing your home, avoid taking the cash-out option. While tempting, it ultimately increases the mortgage balance. Instead, ask about cash-in refinancing; by bringing cash to the table you can lower your mortgage amount and potentially qualify for a lower interest rate.
- Choose a 15-year mortgage
Many buyers think a 15-year mortgage is out of their budget. Instead, ask your lender to run the numbers for both 15 and 30-year mortgages to compare the monthly payments. A 30-year loan for $200,000 with a 4% interest rate has a monthly payment of $955; a 15-year loan for the same amount has a payment of $1,479. While the additional increase in monthly payments may be difficult to reach, it helps you build equity – and cuts in half the amount of interest you pay over the life of the loan.
- Plan smart home improvements
Home improvement projects are one of the most popular ways to build equity in a home.
“A minor kitchen remodel is one of the best investments homeowners can make,” said Chris Terrill, CEO of HomeAdvisor. “Projects including refinishing the cabinets, updating the countertops and installing new appliances all provide a high return without breaking the bank.”
Other high return on investment projects include installing new windows and doors, bathroom makeovers, adding an additional bedroom, and minor landscaping improvements.