How to build equity in your home
7 ways to increase your home’s equity
Your home's equity is equal to its current value, minus your mortgage's principal balance and the balance of other loans that use your home as collateral.
For example, if your home is worth $300,000, and you owe $200,000 on your mortgage, then you have $100,000 in equity. If you also have a second mortgage for $25,000, then you have $75,000 in equity.
The more equity you have, the more money you might get from selling your home. When you have a lot of equity, you may also be able to use it to get cash with a cash out refinance. Here are seven ways you can build the value of your home's equity!
1. Make a larger down payment
When you first buy a home, the value of your equity is equal to your down payment. If you make a $50,000 down payment, you begin with $50,000 in equity. If you make a $75,000 down payment, you begin with $75,000.
Making a larger down payment might help you avoid paying for mortgage insurance. It can also help you save money in interest over the life of the loan, because you are borrowing less money to buy the home.
2. Pay your closing costs in cash
Many times, you can pay your closing costs by adding them to your mortgage. For example, you might get a mortgage for $270,000, where $250,000 helps you buy the house, and $20,000 pays your closing costs. Paying your closing costs in cash reduces the amount of money you borrow and helps you start your homeowning journey with more equity.
3. Pay off your mortgage faster
Paying off your mortgage faster is a great way to build equity, and there are many ways to do it. You can make an additional payment each month, make bi-weekly payments, or make an extra payment once a year.
You can also make a large lump-sum payment when you have a significant amount of cash. This payment will build your equity and help you save money on interest by reducing your principal balance.
4. Refinance and pay down your mortgage
When rates drop, you may be able to refinance to a lower rate and save money on interest. You can build your equity with refinancing by keeping your monthly payment the same and using the money you save on interest to pay down your principal faster. Learn more about mortgage refinancing.
5. Refinance to a shorter loan term
Refinancing to a shorter term builds your equity because it helps you pay off your mortgage faster. It also helps you save money on interest. Keep in mind that refinancing to a shorter term often increases your required minimum monthly payment.
6. Make valuable home improvements
Making improvements and updates to your home often increases its value, which increases the value of your home's equity. Note that home improvements don't always increase your home's value on a dollar-for-dollar basis.
For example, the National Association of Realtors estimates that a complete kitchen renovation recovers 75% of the cost. This means that a $40,000 kitchen renovation might add $30,000 to the value of your home.
7. Wait for home values to rise
One of the best ways to build equity is to hope the fair market value of your home increases. When your home's value increases, the amount of your equity increases.
Home prices are affected by many factors, such as the housing supply, buyer demand, the economy, and interest rates. Learn more about home price increases.