In case you haven’t seen our intro article on home equity, to remind you, home equity is the value or portion of your home that you truly own. It is the difference between the market value of your home and what you still owe the lender on the mortgage. Building equity in your home is a natural process that takes place over time as you pay down your home loan. However, there are some things you can do to build equity in your home more quickly.
There are several ways to build equity in your home:
1. Put down a large down payment.
If you are able to put down 20% or more when you take out a mortgage, you can avoid paying private mortgage insurance or PMI. PMI is insurance designed to protect lenders in the case that borrowers stop making payments on their loans. But if you can come up with enough down payment to avoid paying PMI, it’s money you can save and instead put toward your principal (which helps you build equity in your home).
2. Make bigger payments on your mortgage.
Mortgage payments go toward the principal, interest, taxes, and PMI (if you have put down less than 20%). If you pay extra toward your mortgage payment and have that money applied to your principal, you’ll be building equity. To do this, you can pay a little extra each month, pay biweekly instead of monthly, or make one extra payment each year. You can also apply any extra income as it comes in–from bonuses, tax refunds, inheritance, or cash gifts–to pay down your principal and build home equity.
3. Get a shorter-term loan when you purchase your home.
With a 15-year loan versus a 30-year loan, you’ll pay more each month, but you will build equity much faster. This is not only because you’ll be paying off the principal in 15 rather than 30 years, but also because you’ll often get a lower interest rate, which is money you could be putting toward building home equity.
4. Watch for home values to rise.
Since home equity is based both on the amount you have paid down on your principal and the current value of your home, if your home value jumps, so will your home equity. However, the opposite can happen as well. Fortunately, the market demonstrates if you hold your home for the long run, you increase the chances your home will rise in value, increasing your home equity.
5. Maintain and increase the value of your home.
Keep your home in great shape. Maintaining your roof, trees, gutters, paint, plumbing, chimney, etc. helps preserve the value of your home. You can also make home improvements to increase the value of your home, thereby building your home equity. But do your research if you decide to make improvements to ensure the time, energy, and financial commitment will justify the investment in improving the property value of the home.
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February 10, 2023
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