Homeownership comes with an extremely useful financial benefit—equity. Simply put, equity is the amount of your home you actually own. It is calculated by the difference between your home’s market value and the amount you owe. You don’t notice it as it grows, but it is a powerful tool you can use to address many financial needs. It’s money you can always tap into for urgent matters and even until retirement. The bigger you have, the more secure your future will be.
So… how do you build your equity? Here’s a list of tips to help you maximize the amount you can earn through your home.
Put Down a Big Down Payment
Kick it off by putting down a big down payment. Depending on your loan terms, you can pay as little as 3%, but that won’t help you build equity fast at all. The best option is to pay at least 20%. This will help you significantly lower your interest rate. You can also avoid having to pay private mortgage insurance. If you have the cash, it will be worth it putting more money upfront as this actually allows you to have more equity to start with.
A larger down payment reduces your monthly payments which leads to a more relaxed cash flow. This can help you make extra payments that will also help you build equity faster, but more on that later.
Even though a big down payment comes with plenty of benefits, you need to consider how much savings you have before making this move. Being left with a small cash reserve will not help you in the long run as you will find it difficult to address financial emergencies.
Pay More on Your Mortgage
If you have the means, it’s a smart move to pay more on your mortgage. Extra payments will help you build equity faster by decreasing the total amount you owe. Just make sure to ask your loan officer how the process is done to avoid penalties. You also have to ensure that your lender applies that money to the principal and not to interest.
One way you can pay more is to add a certain amount on top of your monthly payment. Say, you received a considerable raise. You can channel an additional $200 on your monthly payments. You can also use any extra money you receive like a tax refund or a cash gift.
Another way is to switch to bimonthly payments instead of once a month. Doing so will add an extra payment to your mortgage each year. This will ultimately shorten your total loan term.
Choose a Shorter Loan Term
If your priority is to build equity more quickly, a shorter loan term will always be the more sound choice. That’s because a larger portion of your monthly payments is being applied to the principal rather than the interest.
Shorter loan terms typically already come with lower interest rates, therefore saving you more money in the long run. Additionally, larger principal payments every month will lower your interest payments over the life of your loan. By targeting your principal each month, you incrementally lower the principal balance and interest charged on it.
Improve the Property to Increase Value
Smart choices on home improvements will boost the price of your property. These typically include updating kitchen appliances, improving landscaping, and investing in modern upgrades like solar panels or a smart home system.
A good remodeling project should not only increase your home’s value. It should also improve your experience while living on the property. If you’re comfortable with the upgrades you’ve done, you are more likely to take care of your home for a longer period of time. This will make every dime you’ve spent well worth it.
Just remember that not all updates are worth the money. Don’t assume that all improvements will drive up your property’s value. If you don’t plan things properly, you may just end up losing more. When in doubt, you can always ask your Realtor® to recommend home improvements that will best suit your home.
It’s also important to upkeep your home. Whenever you see small problems, make sure to tackle them right away to prevent them from getting more serious. Once you decide to sell your home, you will most likely spend money on repairs anyway. You can minimize the costs by solving issues upfront. A home that’s falling apart isn’t likely to sell, after all.
Wait for Your Home’s Value to Rise
This won’t be the fastest way to increase your equity, but waiting for your home’s value to rise can also work. More often than not, homes increase in value. When home prices increase in your neighborhood and the demand grows, you can expect your equity to appreciate as well.
It’s unpredictable, but it’s one of the most passive ways to get more value out of your home. If you want to take advantage of this opportunity, you can purchase a home in a desirable neighborhood. The demand in these locations will typically be high due to the number of people wanting to move in, so you can count on the value of your home increasing.
Putting effort into building your equity will reward you in the future. The process may be slow, but it will surely be worth the wait! Just remember that you don’t have to rush into the process. Take a tip that’s feasible for you at the moment and slowly build your way to your goals.