15 important ways to build home equity
Using methods to accelerate the building of home equity is a wise choice, regardless of how long you have been paying off your mortgage or how soon you plan to purchase your own residence. With this strategy, you may sell your house for a larger profit since your home loan debt will remain below the fair market value. It also makes it possible to get financial instruments like a Home Equity Line of Credit (HELOC), which provides a lower-interest borrowing choice for other uses such as home renovations.
What is equity?
Home equity is the portion of your home that you own, calculated by subtracting your mortgage balance from the home’s market value.
Say your home is worth $250,000 and you owe $150,000 on your mortgage. To determine your home equity, you would use the following calculation:
$250,000 − $150,000 = $100,000
Although equity usually builds up gradually, there are ways to efficiently speed up this process. See 15 essential strategies for quickly increasing your home’s equity:
15 important ways to build home equity
1. important ways to build home equityOpt for a Shorter Loan Term: Choosing a shorter loan term, whether securing your first mortgage or refinancing an existing home loan, enables faster equity buildup. Larger payments contribute to quicker principal reduction, translating to increased equity over time. Additionally, shorter-term mortgages often come with lower interest rates, providing a dual advantage.
2. Increase Your Down Payment: Ensure a sizeable down payment, preferably 20% of the home’s purchase price, to avoid Private Mortgage Insurance (PMI). A larger down payment automatically adds to your equity, making it prudent to maximize your initial payment.
3. Exceed Minimum Payments: Accelerate equity growth by consistently paying more than the minimum monthly mortgage payment. This approach reduces the principal faster, resulting in overall interest savings and an expedited equity-building process.
4. Explore Refinancing: Refinancing offers two potential avenues to boost equity. Opting for a shorter term or securing a lower interest rate can expedite principal reduction. This strategy aids in achieving quicker equity gains and potential interest savings.
5. Invest in Remodeling: Undertake home improvement projects that enhance your home’s value. Renovating the kitchen, bathroom, or adding a bedroom can significantly raise your home’s worth. Energy-efficient upgrades may also yield additional savings through rebates or tax credits.
6. Prioritize Maintenance: Regularly address maintenance tasks to preserve your property’s value. Timely inspections and repairs prevent minor issues from escalating, ensuring your home remains in excellent condition and maintains its worth.
7. Pay Closing Costs in Cash: Covering closing costs with cash, instead of rolling them into the loan, reduces your principal amount. This initial lower principal results in higher equity from the outset, coupled with reduced interest payments.
8. Select the Right Neighborhood: Opt for a neighborhood with potential for upward-trending property values. Thorough research or consultation with a real estate agent can identify locations with growth potential, contributing to quicker equity gains.
9. Consider a Fixer-Upper: Purchasing a fixer-upper provides an opportunity to enhance property value swiftly. Use cash savings for early repairs and upgrades, ensuring a return on investment that bolsters your equity.
10. Allocate Windfalls to Your Mortgage: Redirect unexpected windfalls, such as work bonuses, tax refunds, or monetary gifts, toward your mortgage. Applying additional sums to the principal contributes to equity growth and reduces overall interest payments.
11. Stick With Classic Renovation Choices: When renovating, opt for popular or traditional materials to broaden your home’s appeal. Neutral design choices increase appraisal value, ensuring equity growth without limiting potential buyers.
12. Buy a Less Expensive Home: Choose a home below the upper limit of your budget. Smaller mortgage payments allow for easier affordability, facilitating potential improvements or larger payments for quicker equity accrual.
13. Avoid Unnecessary Equity Tapping: Refrain from unnecessary tapping into your equity through cash-out refinancing, HELOCs, or home equity loans. Preserve your equity by saving up cash for expenses like home improvements or debt repayments.
14. Opt for Biweekly Mortgage Payments: Switch to biweekly mortgage payments to expedite equity growth. Making half of your monthly mortgage payment every two weeks results in 13 full payments annually, enabling faster principal reduction and potential interest savings.
15. Exercise Patience: Acknowledge that time is a significant factor in building home equity. Consistently paying down your mortgage and allowing for market appreciation over time will naturally contribute to equity growth. Embrace patience, even during market downturns, as these are often followed by subsequent growth periods.
You may actively and successfully increase your home equity by using these tactics, which will guarantee you financial benefits and freedom for future ambitions.