5 Ways to Build Home Equity

Posted by Marketeering Admin on Sunday, September 2nd, 2018 at 11:21am.

Home equity is the difference between what your house is currently worth and how much you owe. Having equity is like having a savings account with a mandatory monthly deposit. When you buy a home, you count on the fact that your home’s value will appreciate, growing your equity along with it. Equity will grow if the property value increases or if the amount that you owe decreases.

Make a Big Down Payment

The more money that you can afford to put down on a home purchase, the more you are automatically growing your equity. During the purchase, if the buyer has less than 20 percent for a down payment, lenders often require the buyer to purchase private mortgage insurance (PMI), which protects the lender if the buyer stops making payments on the loan. PMI is not tax-deductible like mortgage interest is, which is another incentive to save up for a sizeable down payment.

Choose Shorter-Term Mortgages

The traditional mortgage is a 30-year loan, but choosing a shorter-term mortgage will help build your home equity. For example, with a 15-year mortgage, you will have a bigger monthly payment, but you will be paying down your loan in half the time of a 30-year mortgage. Another bonus to shorter-term loans is that more of your money will go to the principal, and you end up paying much less interest overall.

Pay More Than the Monthly Payment

When you pay your mortgage, you have the option to pay more than what is required. Be sure to indicate that this extra money goes toward the principal and not interest.

Another great way to pay more on your mortgage every month is to enroll in a biweekly payment plan. Under this type of program, you make a payment every two weeks. At the end of the year, you will have made 26 payments, which add up to 13 monthly payments instead of 12. You not only pay down your mortgage and increase your equity, but also reduce the amount of interest that you will pay over the life of the loan.

Make Home Improvements

Increasing the value of your home will grow your equity, and one way to do that is to make your home more attractive to buyers. The National Association of Realtors surveyed buyers who bought homes from 2010 to 2012 and asked them what features were the most important and helped them decide to buy. Surveyed buyers reported that they desired and would pay more for a home with the following features:

  • Garage

  • Air conditioning

  • Fireplace

  • Laundry room

  • Basement

  • Large closets and more storage

  • In-law suite

  • New kitchen appliances

  • Eat-in kitchen

Even if you are not planning to sell your home soon, you still want to increase its value and, with it, your equity. Some features are more region-specific. For example, an AC unit may not make sense in regions where summer temperatures rarely top 75 degrees; and in some areas of the country, a basement is not feasible because of geology.

Stepping up the curb appeal of your home will go a long way toward drawing buyers’ interest and adding value to your home. Think neat and tidy; going all out on elaborate designs may turn buyers away. Present a nice, well-kept yard that doesn’t scream “I require a lot of maintenance.”

Stay in Your Home

The easiest of all the tips is to stay in your home. The longer you own your home, the more you will have paid off — half of the equation — and the more your house is likely to naturally increase in value. You need time to accrue equity, and most in the industry recommend that you stay in your home for a minimum of five years to see this happen. The longer you own, the more equity you will likely have.

The Takeaway

You can increase your home’s equity in a variety of ways, some more budget-friendly than others. Use these tips to decide which choice fits your budget and comfort level best. As your equity rises, so will your options; but if all you have now is time, use that to your advantage and stay put.

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