Homeowners are often looking for ways to increase their home equity, and while building equity is a slow process– it doesn’t have to be a daunting one.
Before you can take proactive steps to increase your home equity, it’s important to understand what home equity is. In simple terms, when you own a home your equity is the portion of the home you no longer owe against. To calculate equity, subtract your outstanding loan balance(s) from your home’s current market value. Your equity will increase as your loan balance is paid, or when property values increase.
Check out these smart ways to build home equity without risking a poor return on upgrade investments:
Make a Bigger Down Payment
Increasing the amount of your down payment reduces the amount of financing against the home, which instantly increases the amount of equity you have from the start.
Opt for a Shorter Mortgage Term
During loan negotiations, you have the option of a 15 or 30-year mortgage. Choosing to finance with a 15-year mortgage increases your equity growth rate by 50%. A shorter mortgage also decreases the amount you have to pay for financing your home via interest charges.
Focus on Paying the Principal
Depending on how you finance your home, making one additional mortgage payment a year can pay off your home loan more than five years ahead of schedule. Making an extra mortgage payment every year may not seem plausible, but pro-rating the amount decreases the pinch on your pocketbook. If your mortgage is $1,200 a month, paying an extra $100 a month is enough to equal an extra mortgage payment every year. If you’re unable to make an additional payment on your mortgage every year, paying more than your minimum monthly payment will yield the same results just on a much smaller scale.