You did it! You’ve saved up a down payment, improved your credit score, and settled on a couple of neighborhoods with the amenities you really want. You’ve even found a real estate agent you love working with.
Now all you have to do is find the right house, and you’ve unlocked new features in the game we call Life. But those new features come with new responsibilities, ones that are easier to succeed in if you have a little thing called home equity. That’s the percentage of the home you — not the mortgage lender — actually own.
Build home equity faster with these tips for increasing your home equity soon than later.
How to Build Equity in Your Home
Someone convinced you it’s time to build home equity (us, it was probably us). Now, you just need two more things — specific instructions and a gorgeous Money Crashers infographic to print, laminate, and hang on your wall so it’s always front-of-mind.
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We gotcha covered. Did you ever really doubt us? One or more of these strategies should do the trick.
1. Make a Bigger Down Payment
When you take out a mortgage to buy a home, the lender always asks for a down payment. How much of a down payment it requires depends on the lender and your specific situation, but it’s usually between 3% and 20%.
Start your equity-building journey off on the right foot (or left foot, if you prefer) by putting down the largest down payment you can manage, even if it’s (much) larger than the minimum the bank requires.
The down payment is instant equity. If you put down $20,000, you have $20,000 in equity from the very first day.
If you need it, read our article on ways to save up a down payment.
2. Choose a Shorter Loan Term (or Refinance to One)
When you take out a mortgage, you can choose how long it takes you to pay it off. That’s called the loan term, and it’s one of the most important decisions you’ll make with regard to a loan of any kind. Terms generally range from 10 to 40 years, with the 30-year being the most common and the 15-year a distant second.
Choosing longer-term loans comes with a host of drawbacks. While it ensures your payments are as low as possible, it increases the amount of interest you pay over the loan since it takes longer to pay off. And longer loan terms are riskier for lenders, meaning they usually have higher interest rates to begin with. It also takes longer to build equity.
So choose the shortest-term loan you can realistically afford in your monthly budget to build equity faster. For more information and examples, see our article comparing 15- and 30-year mortgages.
If you’ve already taken out your loan and now think your term is too long, you can use some of the payment-related tips to build equity faster or refinance into a shorter-term loan.
3. Make Bigger Payments
Lots of people have to opt for longer terms at first because that’s the monthly payment they can afford. But if things go well, your pay should increase substantially by halfway through the loan.
Many homeowners refinance along the way to take advantage of new circumstances, like better credit scores and higher incomes. But if you’re [this] close to paying off your mortgage or would just rather keep the flexibility a longer loan with lower payments gives you, you could just make larger payments.
You can either tack on an extra amount whenever you can afford it or set your monthly payment to a specific amount over the regular payment. Adding even a paltry $25 per month could net you an extra $3,000 after 10 years.
If you get paid twice per month or weekly, switching to bimonthly payments could help ease the burden. They won’t help you pay your loan off faster by themselves. But paying half your mortgage on the 1st and 15th of each month could make paying a bit extra each time seem more manageable.
Just note that if your mortgage’s interest rate is low enough, it may be smarter to pay off higher-interest debt first or even invest it so it can earn you money for retirement. If you’re unsure which to do, read our article on investing versus paying off debt.
4. Make Biweekly Payments
Unlike bimonthly payments switching to biweekly payments can actually help you pay off your loan faster. Bimonthly just splits your payment in half, with a due date twice in one month.
But biweekly payments happen every two weeks. And the way our calendar works, every third month is a week longer than the two preceding it. By the end of the year, that adds up to four weeks (one whole month). So by paying biweekly, you trick yourself into paying a full extra payment each year.
5. Put Cash Windfalls Toward Equity
Even if your financial situation is the same as it always was, that doesn’t mean you can’t get ahead on your mortgage. Every time you have a bit extra or get a windfall of cash, such as a tax refund or inheritance, put it toward your mortgage.
It takes a lot longer that way than making regular higher payments, but every little bit helps.
6. Pay Enough to Cancel Your Mortgage Insurance
Lenders charge borrowers private mortgage insurance to protect their investment if you flake out. But once you get up to a certain percentage paid off, you can cancel it.
For a conventional mortgage, that amount is 20%. Putting down 20% ensures you never have to take out a policy. But if you already have one, make a concerted effort to pay your loan down to the right amount to cancel it.
After you get there, you can put the amount you would have paid for mortgage insurance toward your housing payments. It’ll seem like you have more room in your budget monthly because you won’t be paying extra trying to get to the goal amount, but you’ll also be paying more toward your mortgage in the form of your mortgage insurance amount.
Note that non-conventional loan types, such as government-backed loans, may have different rules regarding mortgage insurance. Check with your lender for more information.
7. Make Home Improvements
Certain home improvements can increase the value of your home while making it a more pleasant place to live. And if you increase your home’s value, you automatically increase your equity.
Kitchen and bathroom remodels are perennial favorites. If you’re short on cash, a coat of paint or some attractive evergreens never hurt anyone. If you know what you’re doing, you can even DIY broken walkways.
Keep home equity in mind when forced home improvement projects rear their ugly heads too. If you need to replace broken windows, opt for energy-efficient upgrades. And think about storm-resistance if you live in an area prone to natural disasters like hurricanes or tornadoes.
But not all upgrades increase your home equity. Anything particular to you or that over-increases the value of the home compared to your neighbors’ homes might make your life easier. But that doesn’t mean it makes the home more valuable to anyone else.
For example, a finished garage may make the perfect playroom for you, but most people use garages to store icky stuff they don’t want staining that carpet. And some people may want to (*gasp*) park there.
And if any improvement makes your home significantly more expensive than neighboring houses, you may have successfully vanquished the Joneses and taken your rightful place as the it-household, but you haven’t done as much for your equity as you’d hoped. Neighboring homes affect your home’s value, so things that might increase your equity by several thousand dollars in a really expensive neighborhood might do little to nothing in an area surrounded by lower-priced homes.
8. Wait for the Value to Increase
Even if you do absolutely nothing, your home is likely to increase in value over time. And value increases automatically increase your equity.
That doesn’t mean it won’t drop. Certain market conditions can cause home values to go down, especially after an artificially hot market. But over time, it should work out in your favor.
And if you happen to want to sell right when home values are down, rent it out (or learn to be an Airbnb host) and sit on it for a couple of years until home prices are back up, assuming you can find (and afford) another place to live in the meantime.
Just don’t allow the home to fall into disrepair. That could have the opposite effect.
Why You Should Build Equity in Your Home
It’s easy to think (or maybe wish is a better word) you’re set once you buy a home, but you’re really just starting. Your next step is building equity, which helps in three key ways.
- Increases Your Net Worth. You don’t win any prizes for dying with the most toys (or cash), and you can’t take it with you. But the higher your net worth, the more comfortable your life and the better your borrowing options.
- Gives You Something to Borrow Against. Most people only have one or two things of sufficient value to borrow large sums of money against: their retirement fund or their home.
- Increases Resale Profit. If you increase your home equity, you increase the amount of money you make when you sell your home.
Building your home equity faster than usual is rarely as cut and dry as simply paying off your mortgage and increasing the value of your home. It takes work and dedication — sometimes even sacrifice.
Just be cautious of any prepayment penalties in your contract. They could be high enough to make prepayment or refinancing more expensive than it’s worth in equity. If that’s the case, use the extra money to start or build an emergency fund, pay down high-interest debts, or increase your retirement savings.