The equity you have in your home is the percentage of it that you own. So if your home is worth $250,000 and you have a $200,000 mortgage, then your equity is 20% ($50,000). Equity is an asset. You can use it as collateral on a loan, or it can pay for the down payment on a new house once you’re ready to sell.
Everyone wants to increase their equity and reduce their mortgage costs. But not everyone knows how to do this as fast and smart as possible. So here four ways to help you build your equity and become mortgage-free sooner rather than later.
What they told you is true: the more you put down, the less you pay. One reason for this is that a large down payment reduces your principal, giving you more equity in your home from day one.
But there’s another reason. A bigger down payment means you pay less interest to the bank for carrying your mortgage. Remember that each month you pay interest on the outstanding balance you owe on your home. And the bigger the balance the more interest you pay, which can really add up over time.
So get a head start on building equity by making a bigger down payment. A little bit up front can really go a long way.
Your amortization period is how long of a mortgage you’ve agreed to take out with your lender. A long amortization can sound appealing. But remember it can come with a big cost. Each month you’ll be paying down less of the principal and more in interest, and this means you’re building equity more slowly.
So consider shortening the amortization period to 15 years. Not only will you build equity much faster than you would have on a 30 year mortgage, you’ll also pay far less in interest over your amortization period. This can really add up to huge savings over the short term.
A little bit of belt-tightening can lead to a lot of equity building. So see if you can budget a couple hundred dollars more per month to put towards your mortgage. That’s a couple hundred dollars more of your home that you own—and a couple hundred dollars you don’t have to pay in interest to the bank. It’s win-win.
But if you’re on a tight budget, it’s still worthwhile to start small. So consider putting any financial windfalls towards your mortgage payments. Whether it’s your tax return, a work bonus, or even just some good financial luck, a small bit here and there goes a long way to towards reducing your principal and building your equity.
Always wanted that kitchen renovation? The bathrooms look like they need an update? What about some landscaping out front? These are all great ways to improve your home. They’re also great ways to increase its value.
So consider paying it forward by making strategic investments in your home. Not only do you get to enjoy the improvements, you’ll also enjoy the increased value of your home when it comes time to sell. Buyers will be impressed with the modern kitchen or the beautiful landscaping, and they’ll be willing show you by making higher offers.
There are ultimately two ways to build equity in your home: pay your mortgage more quickly, and make strategic investments to increase your home’s value. So if you really want to build equity faster and smarter, consider doing both. You’ll be amazed at how quickly your investment in your home grows.