How to Build Home Equity - 6 Steps for Homeowners

Marcela Otero
Mar 3, 2017

It is a financial truism that the more equity you have, the better. Why? The day you buy your house, your equity is the amount of your down payment. As you pay off your mortgage, whatever goes towards the principal increases the amount of equity you own. For most people, their home is their biggest investment, and acquiring more equity builds personal wealth, as well as opens up an array of possibilities. Since equity is the amount of your home that you actually own outright, it is a quantifiable asset, which can then be borrowed against or help provide a nest egg for the future.

There are a few ways you can obtain equity fast:

  1. Home improvements - Planning repairs or remodels on your home can be an easy way to add value to your property, and don’t necessarily have to break the bank. Changing light fixtures and doing light landscaping are inexpensive ways to boost property value. Realtors and remodelers also agree that even just replacing your front door with a brand-new steel one can have a huge impact on the resale value of your home (the project can recoup up to 129% of its value, according to Remodeling magazine). Second in line, albeit more expensive, is a kitchen remodel. A word to the wise, though, any kitchen remodel should make sense with the property value (don’t, for example, do a $50,000 kitchen remodel on a $100,000 home). Bathroom additions, though popular, yield the smallest return.

  2. Pay more towards your principal - This option is obviously not within the reach of everyone’s budget, but making just one extra principal payment every year can dramatically reduce your debt by as much as seven or eight years. Making that extra payment can be managed with a work bonus or tax refund, without cutting into your regular annual budget. Remember to check first that your mortgage doesn’t have an Early Repayment Charge.

  3. Choosing a 15-year mortgage - When first buying your home, a shorter mortgage might be more beneficial to you than the traditional 30-year FRM. Many people mistakenly assume that halving the terms will double their monthly payment. Be sure to do the math. This isn’t necessarily true. For instance, a $200,000 at 3.8% interest for 30 years would have a monthly payment (excluding taxes, insurance and PMI) of around $932. A 15-year term for the same amount and interest rate yields a monthly payment of $1,459. The difference is little more than $500. If this is manageable within your finances, by all means, go for it! Your pocket will thank you in the long run. Not only will you build equity quicker, but you’ll pay off your house in half the time. Take advantage of our comparison page where we discuss how to find the best mortgage rate for you.

  4. Larger down payment - This is another option that is not a one-budget-fits-all sort of deal. Perhaps your finances can’t take the hit of ponying up a large amount of money all at once, even if it does create instant equity. Though there are lots of options out there for obtaining mortgages at good interest rates despite a low down payment, it’s worth considering that the traditional 20% of purchase price will not only get you out of paying for private mortgage insurance, but also lower the interest rate on your loan (thereby building your equity faster).

  5. Refinance your home - Let’s say ten years ago you bought your first home. You couldn’t afford a large down payment, or high monthly installments, so you went for an FHA 30-year mortgage, with private mortgage insurance. Now, your financial situation has changed. You got promoted or your business is doing great. In any case, you have more disposable income. If you refinance your home today into a 15-year loan, you can take advantage of historically low interest rates, and reduce your long-term interest costs by as much as 60%. An excellent option for homeowners whose house in underwater is relying on the incentives built into the government’s Home Affordable Refinance Program (HARP), set to end in December 2017. When you take out a shorter-term refinance via HARP, some of the fees and closing costs are waived. Check out our guide for more information.

  6. Play the long game - Though waiting for home values to rise is completely out of your control, by that same token this method is also completely effortless on your part. As people have become more reticent to sell their homes, preferring to update and remodel, the housing market is seeing values rise beyond projections.

 

Whatever you decide to do, remember that these are just a few of the ways in which you can acquire more equity. Take your time and study the options available to you within your finances. If early payment of your mortgage simply isn’t possible, incorporate some of the other budget-friendly adjustments or see if a refinance is the choice for you.