Buying a home is one of the most expensive purchases you will ever make. It is also potentially one of the best investments you will ever make. The key is to build home equity. Home equity is your home’s market value minus what you owe. The difference is the part you actually own.
You don’t have to do anything to build equity in your home other than make your regular monthly scheduled payments. Typically your home equity will increase with every payment you make. As home prices climb higher, your property is worth more. The problem is natural appreciation can take a long time.
Fortunately, there are ways to build home equity faster.
1. A bigger down payment
Home equity begins with your down payment. The bigger the down payment, the higher the home equity you have from the start.
2. Pay more
Making mortgage payments every two weeks instead of once a month will shave up to 6 years on a 30 year mortgage. That’s a big savings for what adds up to one extra mortgage payment a year. If you aren’t sure how that would impact your monthly payment you can get an estimate with this online calculator. You’ll want to contact your lender if you decide to pursue the option.
Round up your monthly payment. This technique can help you build equity faster without straining your budget.
Another option is to pay more at random whenever you can, taking advantage of sudden chunks of cash like from bonuses, gifts, inheritance or tax refunds. Be clear when adding to the regular payment amount that you want the extra money applied to your mortgage principal.
3. Shorter loan length
You can build equity twice as fast by securing a 15-year mortgage instead of a traditional 30-year mortgage. Now that also means you’ll have a higher monthly payment which could put you in a financial bind.
4. Make meaningful improvements
Cosmetic changes like paint or a new appliance are unlikely to increase the value of your home. But major renovations like a new kitchen, adding a bathroom or increasing square footage will have a big impact. Changes that add to the efficiency of a home, like adding insulation, or replacing a security door, are also good for adding value to your home, thus building equity.
Not only is building home equity a sound financial move but it can also help you in other areas.
It may allow you to eliminate Private Mortgage Insurance or PMI. PMI generally runs between $30 and $70 a month for every $100,000 owed. Most lenders will remove PMI once the principal balance of the mortgage reaches 80% of the homes original value.
You can also borrow against your home’s equity to pay for repairs, pay for education or pay off credit card debt.
Before you decide which option might work for you, consider all of your other financial obligations including paying off debt or saving for retirement. The best financial plan is a well balanced financial plan.