Home equity is arguably one of the biggest perks of being a homeowner. It is an asset and part of your total net worth. You can use it to pay off other debts, fund your retirement, pay for a child’s education or wedding, or use it to purchase your next home. However you plan to use your equity, there are several ways you can build it.
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Home equity is simply the difference between the fair market value of your property and the mortgage balance you currently hold. Though you build equity every month you write a check for your mortgage payment, there are ways to build equity at a faster pace.
Larger down payment
When making the down payment on your home purchase, you are automatically acquiring equity, because you have immediately lowered the loan-to-value ratio. With conventional financing, a larger down payment typically equates to a lower interest rate, which will also help you gain equity more quickly over time.
By increasing the frequency and amount of your payments to your mortgage holder, you will significantly increase equity in your home. In the beginning years of your mortgage, the majority of your mortgage payment is going towards interest instead of principal.
For example, after five years of making your required monthly mortgage payment on a $200,000 loan at 4% interest, you will have gained approximately $19,104 in equity and have made $57,290 in payments. By paying an extra monthly payment of $100 for five years, you will have gained nearly $26,000 in equity.
This step allows you to sit back as your home value rises. Homes usually gain equity over time simply through price appreciation, but it isn’t always the case – especially in a down economy. If you keep your home well-maintained and the economy is stable, your home is likely to increase in value over time.
Shorten your mortgage term
Homebuyers who finance with a 15-year fixed mortgage gain equity much quicker than those with a traditional 30-year fixed mortgage. Though a shorter loan term increases the size of monthly payments, shorter loan terms typically come with lower interest rates, allowing you to deflect mortgage interest at a faster pace.
Increase your home value
Because equity is the difference between the value of your home and the amount you owe on your mortgage, increasing home value increases your equity. Certain home improvements are known for getting homeowners a great return on their investment, such as:
- Minor kitchen and bath remodels
- Creating a wide, open floor plan
- Adding space
- Well-kept landscaping
- Updating the home (removing popcorn ceilings, paneled walls, etc.)
The best renovations to make are ones that correct a defect that makes your home less desirable or valuable while staying relative to other homes in the area. Don’t price your home out of its neighborhood.
Home maintenance is an essential part of being a homeowner and increasing your home’s value (which increases your equity). Although an aesthetic update may sound more enticing, you should address the basics first. Imagine yourself as a homebuyer again. If you are viewing a home on the market, are you going to be able to overlook a roof in need of replacement because the kitchen has granite countertops? Probably not.
To upkeep and/or increase your home value, it’s important to pay attention to the parts of your home that keep it functioning well, such as:
- Attic insulation
- Rain gutter
- Storm doors
- A/C and furnace
Interested in tapping into your home equity? Check out our Refinancing Guide for information on refinance types, the cost of refinancing, the best time to refinance and more!