If you’re a homeowner, building home equity can make a big difference in your future finances. Unlike other large purchases such as cars that lose value over time, homes steadily increase in value when you treat them right.
What is home equity?
In short, home equity is the amount of your home that you own. To calculate equity, subtract your mortgage balance from your home’s market value. So, if your house is worth $300,000 and you owe $200,000 on the principal, your current home equity is $100,000. Building equity is important to plan for future expenses, including remodeling your house, buying another home, paying college tuition, and saving for retirement. Essentially, the more equity you have, the more wealth you will build and the more money you will be able to borrow from lenders. Ready to build your home equity? Follow these steps to get started.
- Make Home Improvements
It’s no secret that the right home improvements can boost your home’s value. Do some research or talk to a realtor to find out which home renovations will provide the greatest value and return in your area. Because of the pandemic, many homeowners are looking for a home with an office, an upgraded kitchen, and an outdoor living space. This can also help sell your home faster when the time comes. Smaller home projects such as replacing a garage door, adding smart home features, and boosting curb appeal can also increase your home’s equity.
- Pay Your Mortgage Off Sooner
Mortgage payments reduce what you owe while your home gains value. Making extra payments on your home will shorten the lifespan of your loan and increase your home’s equity. One way to do this is to set up bi-weekly payments to equal one extra payment each year. With the extra payments, you’ll be able to pay off your mortgage more quickly and build equity much sooner – meaning you’ll have less interest to pay in the long run.
- Switch to a 15-year Fixed Mortgage
If you want to pay off your mortgage and build equity quickly, a 15-year mortgage is better than a 30-year mortgage. As a bonus, interest rates are also generally lower on 15-year mortgages versus 30-year mortgages. A low rate combined with the fact that you’re paying interest on the loan for half the time than you would on a 30-year loan means you’ll spend less on interest, pay more on your principal, and save money over the life of your loan. That said, keep in mind that monthly payments are higher on short-term loans than on loans with longer repayment terms. You may also consider refinancing to a lower interest rate, which can save you hundreds each month and shorten the life of your loan.
- Wait for Your Home’s Value to Rise
Owning real estate can offer big returns if you’re patient and willing to wait for home prices to increase and for demand to go up along with your home’s value. The longer you own your home, the more equity you will accrue. History shows the value of homes will only increase over time. However, the market does have its ups and downs – and home values can decrease unexpectantly.