When you own a home that’s mortgaged, your lender holds a financial interest in the property. Home equity is the amount of your home that you truly own; it’s also a valuable asset that can be cashed in to fund a wide array of wants and needs. As Investing Answers explains, your equity is determined by subtracting the amount of mortgage debt from your home’s value. Understanding how to build equity in your home can increase your financial cushion and help you plan for the future. How do you do it?
How to Build Equity in Your Home
When you break it down to the basics, there are two things that build equity. The first is a reduction in the amount of debt against the property. The second is an increase in the property’s value. Fortunately for homeowners, you can use several different strategies to take advantage of one or both of these equity builders.
Make a Big Down Payment
Making a sizable down payment offers several benefits (source). First, a big down payment means that you’ll owe less money and be seen as less of a risk by your lender, so you’ll likely enjoy a lower interest rate. Making a down payment of 20 percent or more also allows you to dodge the requirement for private mortgage insurance, which can provide you with significant savings. Finally, a big down payment has a direct impact on your equity because you’ll have a bigger stake in your property from the very beginning, allowing you to start your time as a homeowner with more equity than a buyer who makes little or no down payment.
Pay Down Your Mortgage
A small down payment doesn’t doom you to a lifetime of low equity. Paying down your mortgage is also an effective way to increase your home equity. As The Truth About Mortgage indicates, there are several ways to pay down your mortgage quickly:
- Pay more than required each month. Mark that the extra should be applied to the principal balance.
- Pay your mortgage biweekly. This allows you to make the equivalent of 13 monthly payments each year, so you pay down your debt more quickly.
- Put financial gifts, bonuses, and other windfalls toward your mortgage. You weren’t expecting the money, so you won’t miss it, and it can help you build equity.
- Refinance to secure a shorter term and lower interest rate. Your monthly payments will likely go up, but you’ll build equity faster.
Improve Your Property
Making targeted home improvements can increase both the value of your property and the amount of equity you have in it (source). Plus, remodeling your home’s interior and enhancing its curb appeal can make the home more comfortable and more valuable. Not every project boosts the property’s value, but many do, and the projects don’t have to be large or expensive to make a difference. For example, updating lighting, replacing old doors or windows, and adding insulation can improve your home’s efficiency, shrinking your energy bill and increasing its value. Even painting the walls or installing new landscaping can have a positive impact on your home equity.
Historically, homes tend to increase in value over time as home prices rise, according to SmartAsset. If you can’t pay down your mortgage or take steps to improve the property, be patient. As time passes and you make your regular mortgage payments, your property’s value will likely go up, increasing your equity with minimal effort on your part.
If you want to learn more about how to build equity in your home, talk to the friendly loan experts at PrimeLending Twin Cities. Whether you’re a homebuyer intent on starting out on the right financial foot or a homeowner interested in exploring the possibility of refinancing, we can help. We offer personal service and an extensive assortment of home loan products, so it’s easy to find the right loan for your needs and goals. Contact us today to learn more.