How to Build Equity Fast
Published on July 16, 2024 | 6 Minute read
Melanie
Ortiz Reyes
Content Specialist
Building equity in your home is a powerful way to increase your net worth and achieve financial stability. Equity is the difference between your property's market value and the amount you owe on your mortgage. Essentially, it’s the portion of your home that you actually own. While building equity can take time, there are strategies you can employ to accelerate the process. Here’s a detailed guide on how to build equity fast.
1. Make a Larger Down Payment
One of the simplest ways to start with more equity in your home is to make a larger down payment. Instead of the traditional 20%, if you can afford to put down 25% or 30%, you'll instantly have more equity. This not only reduces your mortgage payments but also decreases the amount of interest you’ll pay over the life of the loan.
2. Opt for a Shorter Loan Term
While a 30-year mortgage is standard, opting for a 15-year mortgage can help you build equity much faster. The payments are higher, but more of each payment goes towards the principal rather than interest. This accelerated schedule means you’ll own your home outright in half the time and build equity twice as fast.
3. Make Extra Payments
If a shorter loan term isn’t feasible, consider making extra payments on your mortgage. Even small additional payments can make a significant difference over time. For example, making one extra payment per year can shave years off your mortgage and save thousands in interest.
- Biweekly Payments: Instead of making one monthly payment, split your payment in half and pay every two weeks. This results in 26 half-payments, or 13 full payments a year, effectively making one extra payment annually.
- Round Up Payments: If your monthly mortgage payment is $1,485, round it up to $1,500. The extra amount will go directly towards your principal.
- Bonus and Tax Refunds: Use any windfalls, like bonuses or tax refunds, to make additional principal payments.
Here are more tips on how to pay your mortgage off early.
4. Increase Property Value
Increasing your home’s value is another effective way to build equity. Home improvements and renovations can significantly boost your property’s market value. Here are some upgrades that typically offer a high return on investment (ROI):
- Kitchen Remodel: Modernizing your kitchen with new appliances, countertops, and cabinets can significantly increase your home’s value.
- Bathroom Remodel: Upgrading bathrooms with new fixtures, tiles, and a fresh coat of paint can also add value.
- Energy-Efficient Improvements: Installing energy-efficient windows, doors, and insulation can make your home more attractive to buyers and increase its market value.
- Curb Appeal: Simple landscaping, a fresh coat of exterior paint, or new siding can enhance your home’s exterior and add value.
Here are more tips on how to enhance curb appeal.
5. Refinance to a Lower Interest Rate
Refinancing your mortgage to a lower interest rate can help you build equity faster. With a lower rate, more of your monthly payment goes towards the principal rather than interest. Additionally, refinancing to a shorter loan term can accelerate equity building. However, consider the closing costs and fees associated with refinancing to ensure it’s a financially sound decision.
6. Avoid Negative Amortization Loans
Negative amortization loans can seem attractive due to their lower initial payments, but they can be detrimental to building equity. With these loans, your monthly payment may not cover the interest due, causing your loan balance to increase. Instead, opt for a fixed-rate or traditional adjustable-rate mortgage to ensure your payments are contributing to your equity.
7. Stay on Top of Maintenance
Regular maintenance can prevent small issues from becoming major, costly problems that can devalue your home. Staying on top of repairs and upkeep not only preserves your home’s value but can also improve it over time. This includes:
- Roof Maintenance: Regularly inspect and repair your roof to prevent leaks and structural damage.
- HVAC Systems: Keep your heating and cooling systems in good working order through regular maintenance.
- Plumbing: Fix leaks and maintain your plumbing to avoid water damage.
- Foundation: Address any foundation issues promptly to avoid costly repairs later.
8. Leverage Home Equity Wisely
Once you have built some equity, you can leverage it to make further investments. Home Equity Loans or Home Equity Lines of Credit (HELOCs) allow you to borrow against your equity. However, it’s crucial to use this money wisely. Investing in further home improvements or paying off high-interest debt can be a good use of your equity, but avoid using it for unnecessary expenses that don’t offer a return on investment.
According to Bankrate, HELOCs can be risky, as the variable interest rate can increase. Keep this in mind.
9. Stay in Your Home Longer
Simply staying in your home for a longer period can help you build equity. The longer you stay, the more principal you pay down, and historically, real estate values tend to appreciate over time. Moving frequently can result in high transaction costs, which can erode your equity gains.
10. Monitor the Housing Market
Keeping an eye on the housing market can help you make informed decisions about when to refinance or sell. If property values in your area are rising, your equity is growing. Conversely, in a declining market, it might be prudent to hold off on major decisions until values stabilize.
Building equity fast requires a combination of strategic financial decisions, home improvements, and consistent maintenance. By making larger down payments, opting for shorter loan terms, making extra payments, and increasing your property’s value, you can significantly accelerate your equity growth. Additionally, refinancing to lower interest rates, avoiding negative amortization loans, and leveraging your home equity wisely can further enhance your efforts.
Remember, building equity is not just about paying off your mortgage; it’s about increasing your home’s value and making smart financial moves. By staying informed and proactive, you can achieve your goal of building equity quickly and efficiently. Whether you’re aiming to boost your net worth, prepare for future investments, or ensure financial security, these strategies can help you make the most of your home investment.