Ways to Build Home Equity
Building home equity is an important part of homeownership. Not only does it represent your financial stake in the home, but it can be considered an asset that allows you to take out additional lines of credit. The following guide can help homeowners find ways to increase the equity of their homes.
What is equity?
Home equity is the homeowner’s interest, or share, in a home. In other words, it is how much of a property you truly “own”. Equity represents the amount that would be returned to the homeowners after the remaining balance of the mortgage is paid.
For example, if a homeowner purchases a home for $200,000, makes a 20% down payment of $40,000, and takes out a $160,000 mortgage, they would have a 20%, or $40,000, equity stake in the home.
Five ways to build equity in your home
The following are five of the most effective ways to build equity in your home.
- Make a large down payment. The easiest, fastest, and most effective way to build equity in a home is by making a big down payment. The larger the down payment, the larger the stake in the home the homeowners have. While industry standards for a conventional loan require a 20% down payment, putting down even 21% can give you more initial equity.
- Prioritize paying off the mortgage. With every mortgage payment you make, your home equity increases. Make paying off the mortgage a priority by paying extra each month, making an additional payment towards the principal each year, or refinancing to a shorter loan term.
- Remodel or renovate inside. Renovating or upgrading your home’s interior can increase its property value – and your equity. Look for remodeling projects with high return on investment, or ROI; this maximizes your return on investment at resale. Minor bathroom remodels, such as replacing a shower surround or installing a new vanity, consistently have the highest return on investment. Other projects with high ROI include minor kitchen remodels, finishing basements or attics to include an additional bedroom, or even painting or updating light fixtures.
- Make exterior improvements. Exterior improvements can help create equity in your home as well. Adding a new deck or patio, replacing windows or siding, or adding landscaping can raise the property value – and the equity – of your home.
- Wait for home prices to rise. Patience is a virtue, particularly in real estate. The majority of homes increase in equity as prices naturally rise. It is important, however, to expect the unexpected; market conditions can change quickly, which could cause a sharp decline in your home equity.