How to Build Home Equity
While it is possible to get into homeownership with little upfront investment, there can be many benefits to building up equity in a property. Mortgage equity is the value of the homeowner’s stake in a home. It is basically how much the home is worth minus how much is still owed on the mortgage. Having plenty of equity helps protect against foreclosure in case of financial hardship, it makes it easier to sell or refinance your home when the time comes, and it can be a source of emergency funding.
The good news is some of equity building happens without you having to lift a finger. If you want to build equity even faster, there are several steps you can take. Here are five things you can do to increase your home equity:
1. Sit Back and Wait
The real estate markets in most places increase in value over time. This has to do with inflation. As prices for everything else goes up, so do home prices. Some markets increase in value faster than others, based on their desirability to buyers. Your general location and neighborhood are factors to consider when buying to help build equity faster. It is possible for home prices to fall in economic downturns, but if you have time to stay in your home for many years, you should see prices climb higher than when you bought.
2. Pay Your Mortgage Bills (Faster)
Every time you make a mortgage payment, a portion of it goes to the principal of the loan. That reduces how much you owe and increases your share of equity. At the beginning of a loan, most of your check is going towards interest. You can speed up the process of paying down the principal balance, but either adding extra mortgage payments each year or increasing how much you pay each month. If you specify that all the extra money goes toward the principal, you will earn equity quicker and be giving up less money in interest.
3. Increase Your Down Payment
If you are just about to buy a home, you could increase your down payment size from the minimum requirement. This gives you instant equity when you move in and an automatic cushion of having a significant investment in the house.
4. Make Home Improvements
If you make improvements to your home that add real value, like a kitchen renovation, your house could be worth more and your equity would increase. Not all improvements are created equal though and many will not change the value of your property much. Consult with a real estate professional before trying to build equity through major home improvements.
5. Maintain Your Property
Letting your home fall into disrepair is a sure way to lose equity. By making sure the roof and HVAC system are in good order, maintaining the yard, and keeping the inside updated are other ways to make sure your equity grows over time.
Increasing your home equity is a smart move. Some methods require effort, others do not. However you gain your equity, having a bigger stake in your home will put you in a more secure financial position as a homeowner.