Building equity in your home can be an overlooked benefit to home ownership. Home equity is the amount of home that you actually own after accounting for debt. The best way to calculate equity is to find out the current market value of your home and subtract your mortgage balance. The benefits of building equity mean that you have collateral for financing other necessary loans or making a higher profit when selling the house. Instead of simply paying the same monthly mortgage, there are ways to speed up the amount of equity you build over time.
Make a Down Payment of 20% or More
If you can afford it, putting at least 20% down on your home ensures that you avoid PMI (private mortgage insurance), so more money is going toward your principal loan instead of interest. Take a look at your mortgage statement to see how much of your payment goes towards interest vs. principal each month. With conventional loans, the majority of payments go toward interest in earlier years and slowly changes so that more money pays off principal. The more that goes to the principal, the more equity you’ve built.
Pay More Than You Need To
If you’re able to pay more than your monthly mortgage, you’ll build equity faster. First, check with your lender that extra payments go toward principal and not interest. For example, instead of paying $1000 per month, take it up to $1,200 or more. Some couples achieve paying more by earmarking one spouse’s salary to the mortgage and living off the other spouse’s income. If that’s not affordable, try making the equivalent of one extra month’s house payment a year. Every extra bit brings down your principal loan and could save you thousands of dollars in interest in the long run.
Refinance to a Shorter-Term Loan
Switching from a 30-year loan to a 15-year one shortens your obligation of interest payments by half. That’s a huge savings in interest and you’ll build equity much faster. The down side of course is that your monthly payments will be much higher with a shorter-term loan. Also, to qualify for such a refinance, you’ll need good credit, a certain amount of equity already, and a low debt-to-income ratio.
Renovate and Upgrade
Home improvement can drastically increase the value of your home. As home value increases, so does equity. Just remember, renovations don’t guarantee a dollar for dollar recuperation. And while you may want to renovate to suit your personal tastes, consider sticking to styles that are more mainstream to attract a wider pool of future buyers.
Stay Put Long Enough for Home Values to Rise
Stay where you live long enough to realize a natural increase in market value. History shows that homes tend to increase in value over time. Of course, home value can decline as well, depending on economic conditions or something happening in your area specifically, so keep informed of the market in your location regularly.
Unless you paid cash for your home, building equity is a slow process. But fortunately, there’s more than one way to achieve building equity at a faster pace. Tightening your finances a bit to get there may be an adjustment, but the financial reward is significant.