Home equity is the difference between a property’s value and its outstanding mortgage balance. Building home equity is important because it allows homeowners to gain financial stability and wealth over time. There are several ways to build equity in your home, including making a higher down payment, increasing your mortgage payments and boosting your home’s value through upgrades and improvements.
Equity provides financial flexibility, as you can use it to pay down debt, cover unexpected expenses or invest in other financial opportunities. Moreover, it can be an essential factor in retirement planning, as your home equity can be a source of income or a means to downsize.
How To Build Home Equity
These are some of the key ways you can build home equity:
1. Make a Large Down Payment
A down payment is the initial payment made toward a home’s total purchase cost. The larger the down payment, the lower the amount you’ll need to finance and the more equity you’ll have in your home from day one. A larger down payment reduces your monthly mortgage payments and can help you qualify for a more competitive interest rate. If you can afford a down payment of 20% or more of the purchase price, you can avoid private mortgage insurance (PMI).
2. Avoid Private Mortgage Insurance
Private mortgage insurance is a monthly payment typically required if you have less than 20% equity in your home. PMI protects the lender if you default on your mortgage payments. However, PMI costs can add up over time, reducing the portion of each payment applied toward the mortgage’s principal. Fortunately, you can take a few steps to get rid of PMI or avoid it entirely:
- Make a down payment of 20% or more. If you’re buying a home, make a down payment of at least 20% of the purchase price to avoid the PMI requirement.
- Make your monthly payments. Make mortgage payments until the outstanding balance reaches 80% of the home’s original value.
- Ask for PMI to be removed. Request that your lender or servicer remove PMI once you reach 20% equity through making extra payments or home appreciation.
3. Make Biweekly Payments
Making biweekly mortgage payments is a simple strategy that can significantly impact building home equity. Instead of making one monthly payment, you’ll split your mortgage payment in half and pay it every two weeks. This results in 26 payments a year, which equals 13 full payments—one extra payment per year.
This strategy reduces the amount of interest that accrues each month, building home equity faster and allowing you to pay off your loan early.
4. Increase Your Monthly Payments
When you pay more than the minimum amount required by the lender, the extra money can go toward reducing the principal balance on your mortgage. To make the most of your increased payments, contact your mortgage servicer and request that it apply the additional funds to your principal—not toward interest or escrowed taxes and insurance.
By paying down the principal ahead of schedule, you can reduce interest costs, build home equity and pay off your mortgage faster. Review your mortgage agreement to ensure you won’t be charged a prepayment penalty.
5. Pay Down the Principal Balance
If you have extra cash lying around—whether from a bonus, gift or inheritance—paying down the principal on your mortgage can help you build equity in your home instantly. This is because every dollar you put towards reducing your mortgage principal is a dollar that you effectively own rather than owe.
Lowering the principal also means accruing less interest over the life of the loan and paying off your loan sooner. This can lead to significant gains in equity, potentially enabling you to access more favorable financing terms for equity-based products like home equity lines of credit (HELOCs).
6. Refinance to a Shorter Loan Term
Refinancing from a 30-year mortgage to a 15-year term will increase your monthly mortgage payments. However, doing so will also significantly reduce the interest you’ll pay over the life of the loan. As a result, your payments will go toward building equity in your home and paying down the principal faster rather than applying against interest. Additionally, refinancing to a shorter loan term means you’ll own your home outright much sooner, giving you greater financial flexibility and stability.
This strategy isn’t an option for everyone. Consider your monthly budget and work with a trusted mortgage professional to evaluate whether refinancing to a shorter term is right for your financial situation and goals.
7. Increase Your Home’s Value
Upgrading and improving your home can be a wise investment if it can potentially increase the property’s value. If this is the case, you can enjoy the benefits of a more comfortable living space while increasing your home equity. That said, it’s essential to research and plan any upgrades to ensure they will add value to your home and be worth the investment. Likewise, consider your budget and weigh the benefits of the updates against the cost.
Here are a few popular ways to increase the value of your home:
- Make necessary repairs
- Add a bathroom or bedroom
- Upgrade appliances
- Renovate kitchen
- Install new flooring
- Paint interior and exterior walls
- Increase curb appeal with landscaping
- Replace windows and doors
- Install energy-efficient features
- Correct inaccurate information about your property on the county’s tax rolls
8. Wait for Your Home’s Market Value To Increase
While there’s no surefire way to predict the housing market, the general rule of thumb is that the longer you can wait, the better. Over time, the overall value of homes tends to trend upward unless there is a significant economic downturn. If you can wait for your home’s market value to increase, you’ll build home equity as the property’s value rises and the loan-to-value ratio decreases. By waiting for your home’s market value to increase, you may be able to sell your property for a higher price and maximize profits.
9. Avoid a Cash-Out Refi
A cash-out refinance is a loan that makes it possible to borrow money by leveraging your home’s equity. While this may seem like a quick and easy solution if you need extra cash, taking out a cash-out refinance reduces the equity you have in your home. Not only can this make it harder to sell your house down the road, but it may also limit your future financing opportunities. To build home equity, avoid any unnecessary loans or cash-out refinancing and instead focus on regularly paying down the principal on your mortgage.
How Long Does It Take To Build Home Equity?
It can take several years to see a noticeable difference in your equity, as it depends on several factors, including the housing market, interest rates and the initial down payment on the property. However, consistent and timely payments towards the mortgage can help increase equity much faster. As the equity in a home builds, you may be able to refinance or qualify with one of the best HELOC lenders for additional financial flexibility.
How To Build Home Equity Fast
If you’re buying a house, you can build home equity fast by making a sizable down payment. Doing so can also help you avoid PMI, reduce the interest rate you qualify for and increase the portion of each payment that goes toward the mortgage principal—helping you more quickly build equity over time.
If you already own a home, build home equity fast by making a lump sum principal payment, increasing your monthly payments or refinancing to a shorter loan term.
Why Is Building Home Equity Important?
Building home equity is an important part of your financial strategy as a homeowner and shouldn’t be overlooked as you attempt to increase your wealth. With consistent payments towards the mortgage and smart investments in your property, you can reap many rewards from increasing the value of your real estate. These are some of the main reasons building home equity is important:
Greater Borrowing Potential
Building home equity opens up opportunities to increase your financial standing by giving you more control over your property and increasing your borrowing potential with mortgage lenders. As home equity builds, you can more easily qualify with one of the best home equity loan lenders using your equity in the property as collateral.
Most importantly, the equity you build can enable you to finance large-scale investments, such as home improvements or major purchases, and help you establish a strong credit score that can lead to future financial growth.
Long-Term Wealth Building
Building home equity is a crucial aspect of long-term wealth building. Not only does home equity provide a safety net in case of emergencies, but you can also use it as a resource for investing in other assets or starting a business. The equity in your home can also help secure a better interest rate on future loans or higher credit limits on credit cards. Additionally, appreciating property values can increase your equity over time, adding to your long-term wealth.
Higher Profits When You Sell
As you make mortgage payments, you increase your ownership stake in the property and reduce your total debt. When you ultimately decide to sell the house, you can reap the benefits of building equity over time—the more equity you have in the property, the greater your profit. By using your earned equity as a down payment on your next home, you may be able to buy a more expensive property without needing additional funds. Purchasing a house can be one of the most significant investments you make in your life, and building home equity is a practical approach to maximizing your return on investment.
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