7 tips to build equity faster8 Minutes
- Home equity is the dollar value of how much of your home you actually own
- Home equity gives you peace of mind and financial stability
- There are many ways to build equity in your home faster
In this article, we’re covering seven smart ways to build equity faster:
- Make a large down payment
- Consider a shorter mortgage term
- Plan extra mortgage payments
- Schedule your payments bi-weekly
- Remove private mortgage insurance (PMI)
- Make home improvements
- Take advantage of appreciation in the long term
Few things feel quite as satisfying as buying a home. Opening the front door for the first time after you receive your keys is like opening the door to your family’s future. Homeownership offers many benefits over renting: predictable monthly payments, potential tax deductions, community ties, and the freedom to make it your own.
Over a number of years, owning your home also means you begin to build equity, which is a valuable asset that can provide financial stability. While it’s true that in the short term, real estate values may decline thanks to normal market fluctuations, history demonstrates that property values rise over the long term. When you own your home, you enjoy greater financial flexibility because you can use your home equity to its maximum benefit. Homeowners enjoy resale value and the ability to use a home equity line of credit (HELOC) to access home equity for other spending needs, like healthcare, tuition, home renovations, and more.
Building equity is the key to homeownership. Simply put, home equity is the dollar value of how much of your home you actually own. Equity is the difference between your home’s market value and your mortgage balance, minus any liens that may be on the property.
Liens are debts that use your property as the promise to repay the debt. For example, if you belong to a homeowner’s association (HOA), and you forget to pay your dues, the HOA can place a lien on your property.
If you have a $300,000 mortgage, and your mortgage balance is $260,000 and there are no other liens on your home, your equity is $40,000.
Every time you make a mortgage payment, you increase your home equity. Choosing a more proactive approach to building equity can be a smart financial planning strategy. There are two main ways to increase equity: pay down your mortgage and increase the property value. Equity may also passively increase over time as real estate values increase.
Some of the strategies below give you additional equity quickly, and some take time to see. You can use any combination of these ideas to increase equity; it’s all about balancing your needs today with your future goals.
1. Make a large down payment
If you’re still planning for your new home purchase or preparing to refinance, there are things you can do to speed up your equity-building efforts. The larger your down payment, the more instant equity you’ll have.
Also, if you plan to pay at least 20% of the purchase price, you can avoid private mortgage insurance (PMI), which adds to your mortgage payment. A bigger down payment can save you money every month.
2. Consider a shorter mortgage term
If you refinance to a shorter mortgage term, you’ll build equity faster, because your loan will be repaid faster. If your current mortgage is a 30-year mortgage, and you refinance to a 15-year mortgage, you’ll also save thousands in interest and probably pay a lower interest rate.
The biggest downside to this is that your monthly payment will be higher. If you have the flexibility for that, though, a shorter mortgage term may be an excellent option.
3. Plan extra mortgage payments
When you make your monthly mortgage payment, part of the payment goes toward the principal amount (how much you borrowed), some of it goes toward interest on the principal, and some of it can go toward property taxes and insurance, if escrowing. The interest is what you pay the lender for lending you money to buy your home.
In the first years of your mortgage, more of the monthly payment goes toward interest. The balance between interest and principal changes as time goes by so that, eventually, most of your payment will go toward principal. Extra payments you make in addition to your regular payment don’t follow this formula; they should go straight toward paying down principal.
This is really powerful because the interest you’re charged every month is based on your principal. To build equity, you want to lower the principal amount as quickly as possible.
Making those extra payments ensures that more of your hard-earned dollars are applied to your principal debt. This accelerates the rate at which you build equity, and decreases the interest you’ll pay overall.
You can make extra payments at any time, and every dollar helps. There are many creative ways to find the funds for an extra payment, including:
- Using overtime or work bonuses
- Earmarking one partner’s salary (or a portion of it)
- Side hustles
- Tax refunds
- Windfalls, inheritances, and monetary gifts
Extra mortgage payments are one facet of a thoughtful long-term financial plan. You could take extra funds and split them up, applying part to your mortgage, another part to your retirement account, and the rest toward a well-deserved vacation.
Pro tip: When you schedule an extra payment, be certain it will apply to principal, not to interest. Some lenders require you to specify. If you aren’t sure how extra payments will be applied, ask your lender.
4. Schedule your payments bi-weekly
Similar to the tip above, you’re making an extra mortgage payment, but in a structured way. How is that different from making one monthly payment? With bi-weekly payments, you use the calendar to your advantage. Instead of making 12 payments per year, you’ll make 26, which means you contribute one extra mortgage payment per year using this method.
If your mortgage is $1,200 per month, regular monthly payments will total $14,400 (12 payments of $1,200) whereas bi-weekly payments will total $15,600 (26 payments of $600), because some months are longer than four weeks.
You might consider this strategy to enjoy more predictability for your budget while you build equity faster. Set-it-and-forget-it payments are also convenient – just make sure your lender doesn’t charge a fee for this payment schedule.
5. Remove PMI
If you put down less than 20% of the purchase price, you probably make a PMI payment each month. Once you have paid down enough of the mortgage principal, you can apply to have PMI removed. For many loans, PMI is automatically removed once your equity hits 22%, but you can request to have it removed once your equity is at 20%.
Pro tip: Removing PMI will lower your monthly payment a bit. Use the extra payment strategy to apply the money you used to pay in PMI to your principal each month. Your bank account won’t feel the difference, but your mortgage statement will.
6. Make home improvements
One of the most fun ways to build equity involves improving your home by making it more attractive, more functional, or larger. There are infinite ways to improve your home – everything from increasing the curb appeal to insulating your attic counts – so long as you are savvy about what kind of return to expect on your investment.
Full remodels may yield increased equity over time, but they’re expensive. Smaller projects, like replacing doors or windows, or improving energy efficiencies and upgrading appliances, can make a difference in the home’s value.
Of course, if you need to remodel and update a space in your home, that will increase your home’s value, and you get to enjoy the updates. The effort and expense might well be worth it, especially if it makes your home more comfortable, safe, and functional for your family.
7. Take advantage of appreciation in the long term
This is a passive, long-term strategy in that all you have to do to build equity is make your regular mortgage payments. You’ll benefit from any increase in property value, which is more likely to happen the longer you stay in your home. However, this strategy may not work if you only stay in your home a few years due to normal market fluctuations.
Building equity in your home takes forethought and patience, but for many people, the effort is well worth it. The sense of accomplishment and peace when you know your home is truly yours is uniquely satisfying. Homeownership opens up additional ways to build generational wealth, providing your loved ones with future security.
It also empowers you to deal with unexpected challenges, whether paying down high-interest debt, funding college tuition, being able to age in place, or other important goals.
Thinking of refinancing or moving soon? Reach out to us to discuss your best home equity strategy. We’re here to help.