4 Ways to Build Equity
A home is one of the biggest purchases you’ll ever make. And while it’s much more than just an investment, there’s no denying the importance of maximizing ownership in your property. Your home equity can be used for everything from future remodels and improvements to retirement, so the more you have of it, the better. Fail to plan ahead though and you could miss an opportunity to build the biggest stake possible. So how can you build equity faster? Let’s cover the basics.
What is home equity?
Home equity is the current value of your home minus the amount that you owe on it. Ideally, you want your home equity to be as large as possible.
Wealth in your home is a long-term goal, and not something that will happen right away. Unless you paid off your entire home in cash before moving in (and let’s be realistic—most of us aren’t doing that), then it’s going to take you awhile to get that number into the positive. Gains in your individual ownership happen as you pay off more of your mortgage and if/when the market value of your home increases. And fortunately, you can take active steps to make both of these things happen sooner than they might otherwise.
How to build equity faster
Your focus when it comes to building equity at a faster pace should be on the two factors that dictate your total ownership:
- How much of your mortgage you’ve paid off
- How much the value of your home has increased
If you can speed up the process on both of these, you can speed up the rate at which you build equity. Here are four ways to do it.
Make a larger down payment
You can’t go back in time and change how much you put down for your home, but if you’re reading up on how to build equity faster before closing on a property, this is definitely something that you will want to consider. The standard down payment on a house is 20%, though many people put down more or less than that. If you have the cash and you’re looking to increase your equity as quickly as possible, it’s worth it to write a bigger check up front. Not only will you lower your interest and monthly payments, but you’ll also be that much closer to owning a positive stake in your home.
Purchase a lower priced home
Here’s another one to consider before you even start looking. A highly-priced home will net you more equity in the long term, but it will take a long time. With a lower-priced home, you’ll be able to offer a bigger down payment and possibly shorten the term of your mortgage as well. Banks are profit-driven, and the amount of money they tell you that you can spend on a house isn’t necessarily what’s smart to spend. Think of your own budget and financial goals, and choose a home that will allow you to pay more and pay faster.
Prioritize paying off your mortgage faster
What’s standing in between you and full ownership of your home? Your mortgage. Every month that you pay money toward your mortgage you’re contributing to both the principal and interest on your home. The principal goes toward your home equity, the interest toward your lender. The goal then is to pay toward your principal as much as you can, in turn paying more toward your own net worth. While the thought of putting even more toward your mortgage every month than you already are may not seem all that appealing, the pay off is surely worth it. Try incorporating one or more of the following tips for paying off your mortgage faster and see if it works with your resources and budget.
- Round up every month. A little bit can go a long way. If your mortgage payment is $1,225 a month, for example, give $1,300 instead. An extra $75 (or $50, or $25) may not seem like much in terms of your home’s total cost, but it will go straight to principal and your home equity.
- Opt for a shorter mortgage term. When it comes to mortgage terms, a 30-year fixed loan is the go-to. But if you’re okay with taking on a larger monthly payment, you can choose a shorter term mortgage and build equity much faster. If you originally went with a 30-year loan but now have the means to reduce it, look into refinancing to a shorter term.
- Funnel gifts, bonuses, and your tax refund into your mortgage. Think of your home equity like a savings account and consider that anything extra you put into it is essentially being saved for later use. By that logic, it makes sense to dedicate all or a portion of any extra money you make during a year to your mortgage. Different lenders have different rules about extra payments, so talk to your lender and find out what the terms are, and be sure to verify with them that the extra amount will be allotted toward principal, and not interest or interest-plus-principal.
- Make an extra payment each quarter. Set aside money every month toward an extra mortgage payment and once a quarter apply it to your principal. You’ll save a ton of money in interest and could shave years off your 30-year mortgage. Again though, first be sure to find out what your lender’s rules are about extra payments.
Improve your home to increase its value
There are a lot of factors at play in terms of how your home’s value appreciates, including the economic growth of your neighborhood, supply and demand, and proximity to certain amenities. And while you don’t have much control over those, you can affect your home’s market value in a positive way by keeping your home well maintained and putting in certain improvements.
Some improvements net more returns than others, so be sure to focus on those instead of wasting money on things that won’t necessarily add value to your property. Remodeling offers Cost vs. Value data for home improvement projects that is searchable by your own city or region so that you can see exactly what’s getting the biggest bang for its buck in your area. You may be surprised to learn that a mid-range bathroom addition will pay off more than an upscale bathroom addition, or that there’s a lot of value to be gained by improving the accessibility of your home.
In addition to home improvement projects, you should also be taking care to maintain your home in the best shape possible. Regular maintenance activities like cleaning out gutters, replacing filters, and making small repairs as they come up will all help your home hold its value so you’re not losing equity through decreased market worth.
The big takeaway
There’s a lot to be gained from making a concerted effort to build equity in your home faster. Putting in more money now might seem difficult to imagine, but it’s almost certainly going to be worth it in terms of your future financial health.
To figure out what’s right and doable for you when it comes to building equity, crunch the numbers either on your own or with the help of a trusted financial advisor. See what it will take to knock a couple years off your mortgage or to chip away at your principal more than you already are each month. And if it’s not financially feasible right now to increase your rate of equity building, don’t worry—while it’s better to start early, starting late is better than not starting at all.
Realtor.com By: Laura Mueller