6 Ways to Build Home Equity

The goal of homeownership is to build equity. Equity is the percentage of your home that you own – the more you pay off the principal, the more you own. Let’s explore the many ways you can build equity in your home.

1. Let the Property Appreciate

Depending on the market, your home could appreciate quickly or slowly. For example, if you bought a home in 2016 for $185,000 with a down payment of $12,050, you would have started out with about 7-percent equity. Since market values rose steadily over the next two years, the equity in your home would have also risen to a whopping 23 percent by 2018.

2. Make a Big Down Payment

While making a bigger down payment definitely enables you to build equity faster, it’s wise to exercise caution with this method. Saving for a larger down payment may cause you to have to wait to purchase a home, which can cause you to miss out on market appreciation. It’s best to find a good balance between down payment, monthly commitments, and savings.

3. Put Windfalls of Money Toward Your Mortgage

When you come into lump sums of money, put them toward your mortgage to bring down the principal faster. When you make these lump sum payments, ask your lender if they are willing to recalculate your monthly payments based on the lower balance due.

4. Pay Your Mortgage Bi-Weekly

Divide your mortgage payment in half and pay it every two weeks instead of once a month. If you follow this payment schedule for a full year, you will end up paying 13 monthly mortgage payments instead of 12. This will cut 5 or 6 years off the length of your mortgage, building equity in your home faster and saving you tons of money in interest.

5. Take Out a Shorter Mortgage Term

Most people opt for the traditional 30-year mortgage, which makes paying the monthly payments much easier. You can build equity much faster, however, by opting for a 15-year mortgage term instead.

There are two potential problems with a 15-year mortgage term, however. The first is that it may make it more difficult to make the monthly payments since they will be twice as high, and the second issue is that it’s much harder to qualify for a shorter mortgage term.

6. Make Improvements and Upgrades to Your Home

Increasing your home’s value through improvements and upgrades will build equity. Keep in mind, however, that simply adding a coat of paint won’t be enough. Big renovations like a new kitchen or adding extra rooms or additional bathrooms will up the value of your home and build equity in it swiftly. Just be sure the improvements you make will be worth it once they’re complete.

As a homeowner, you should be working toward building equity in your home. From allowing the property to appreciate on its own to making home improvements and more, you can build wealth by building equity in your home.