Contrary to popular belief among first-time homeowners, holding the keys to your home doesn’t mean it’s yours. Your name may be on the deed, but ultimately, the bank that holds your loan is in control. The way out is to build home equity.
Home equity is the difference between the value of your home and how much you still owe the bank on your mortgage. It’s the portion of your home that actually belongs to you, not the bank. When the balance owed to the bank is zero, the home is yours.
The faster you build equity in your home, the better. For one, it increases your net worth and makes you more attractive to creditors. Home equity can also be tapped to finance things like college, major renovations and repairs, or even invest in another property. Not to mention that it translates into cash when you move and sell your home.
Here are 12 ways to build home equity faster.
1. Make a larger down payment
Home buyers are often advised to put down 20% of the home’s agreed-upon price. However, different lenders have different standards. Some may accept less than a 20% down payment or not require one at all depending on buyers’ loan type.
Although a low down payment can be a good option for buyers who can’t otherwise purchase a home, putting more down than required helps you build equity faster. It also eliminates the need for private mortgage insurance which can add hundreds of dollars to your monthly payment.
“Putting more than 20% down not only gives you more equity upfront but also means less of the purchase price is financed with a mortgage,” says Steve Nicastro, licensed real estate agent and Content Team Lead at Clever Real Estate. “So this reduces your monthly payments and overall interest costs. In addition, it’s possible the lender will offer you a lower rate if you put more money down. It’s definitely worth considering these benefits, especially in the current interest rate environment, where mortgages can cost 7% APR or higher.”
2. Start with a shorter loan term
Opt for the shortest mortgage term that’s financially reasonable for you. Not only do shorter terms come with lower interest rates, they also allow you to own your home in half the time. A shorter term means your monthly payment will be higher, but you’ll pay less in overall interest and build equity much more quickly.
3. Make half a mortgage payment every two weeks
Making half a mortgage payment every two weeks instead of one payment a month means you’ll make one additional payment on your mortgage every year. This extra payment adds up and can shave years — and dollars — off the total cost of your mortgage.
4. Add extra money on each monthly payment
If you cannot make a half payment every two weeks, add as much extra money as you can to your monthly payment. Most mortgage companies don’t penalize homeowners for making early payments and may even have a special section on their website where you can make a principal-only payment.
5. Refinance for a lower interest rate
Interest rates can change quickly, especially during periods of economic upheaval. If you purchased a home while rates were high, it may be worth it to refinance when rates drop by a percentage point or more. You might also consider refinancing if you have a variable rate that has made it challenging to budget or pay down the mortgage.
There can be downsides to refinancing though. “Refinancing involves various costs – appraisal, loan origination, attorney fees, etc. The interest savings must outweigh these costs for it to be a worthwhile move so it may only make sense to refinance if you plan to stay in your home long enough to reap those savings” Steve Nicastro explains.
6. Skip interest-only loans
An interest-only mortgage can be tempting, especially if money is tight right now. Although this type of loan lowers the monthly payment by allowing homeowners to pay only the interest for a certain amount of time, none of the money you pay goes toward building equity.
In fact, interest-only loans with even short terms, such as two to five years, can cost much more in the long run without any decrease in your mortgage principal.
If you can only afford a home with an interest-only loan, it might be better to wait to buy. Use that time to become more financially stable and save money for a larger down payment.
7. Make improvements
One of the best ways to build home equity is to decrease the amount of money you owe (paying off your mortgage) while at the same time, increasing its value. You can increase your home’s value by renovating or making home improvements.
Typically, renovations with the best return on investment occur in high-traffic areas of your home, such as kitchens and bathrooms. Depending on where you live, outdoor improvements, such as professional landscaping or usable outdoor space, may also increase your home’s value.
8. Watch the market
If you want to build home equity without lifting a finger, keep an eye on the local real estate market. Property values fluctuate for various reasons, and if your neighborhood is experiencing a rise in home values, you might be the beneficiary of hands-off equity building.
9. Pre-pay property taxes and insurance
Most homeowners with a mortgage roll property taxes and insurance into their monthly payments. While this is convenient, pre-paying these extra expenses allows you to use the monthly savings to pay down the principal.
10. Apply unexpected funds to your mortgage
Did you win $100 on a scratch-off ticket from your holiday stocking? Did you get a big bonus or a raise? Did you receive inheritance money or get an unexpected tax refund? Instead of spending that cash, apply it to your mortgage principal.
11. Make your home work for you
If you have a spare room or an accessory dwelling unit, consider renting it to guests. After paying any expenses associated with the rental, dedicate this monthly income to building home equity. Keep in mind that local laws may have specific requirements for this type of rental, and the IRS requires you to report this as income.
12. Stay on top of your finances
Regularly review your finances to monitor your savings and your debt so that you remain on track for your financial goals. Building home equity quickly shouldn’t come at the cost of your financial stability.