How to Build Home Equity

Woman hanging new curtains in house

By Zarine Torrey, Sr. Mortgage Loan Officer

There are many advantages of owning a home, such as pride of ownership, federal tax benefits, improving your credit score and having an asset that you can pull from financially when needed. You can use the equity you built up to pay for a major home improvement project, eliminate high interest credit or even pay for a wedding or college expense. Home equity is defined as the difference between the home’s fair market value and the outstanding balances of all liens on the property. There are many ways to build equity in your home. Here are a few ideas:

Make a large down payment – When you make a large down payment on your home, other than having a lower mortgage balance and less interest expense, it will also give you more equity immediately. For example, if you buy your home for $200,000 and you put down $10,000, you will owe $190,000 on your mortgage. That leaves you with $10,000 in equity. If you put down $50,000, you will owe $150,000 on a home worth $200,000. That $50,000 in equity is more valuable than $10,000.

Making payments – Pay more than the required payment on your mortgage. If your monthly payment is $1,000, pay a little more every month towards principle. You could also go a step beyond that, and make either an extra payment every year or every month. By making an extra payment, you can pay off your 30 year fixed-rate mortgage seven years faster, and in turn, build up equity quicker and save hundreds and even thousands of dollars in interest payments.

Stay in your home for more than five years – The logic here is the longer you stay in your home, the more likely the market will adjust and home prices will increase. The appreciation will boost your investment and your equity without much work on your part.

Renovate your home – Keeping your home maintained and updated will help you when you’re ready to sell. Not only will an updated home sell faster and at a higher value, but it will also decrease the amount of seller costs at the point-of-sale. Some renovation ideas include adding nice shutters, updating the landscaping and leveling a driveway.  Some indoor renovations include, freshening up the paint, updating the kitchen, replacing light fixtures or laying new carpet.

There are many ways to build equity. If not all are achievable, one or two of these ideas will help you become a financially-sound homeowner.