Articles and Advice

Building Equity May Be Easier Than You Think

Increasing your home equity doesn't have to be an insurmountable challenge. Here's how you can do it.

Equity is an oft-used term in most real estate fields and has a rather significant bearing on personal wealth and your future plans. Understanding equity in and of itself isn't difficult, but there are some things you should know that may help build equity and potentially pay off your mortgage.

What is Equity?

Equity is essentially the value of your home minus what you still owe on it. Unless you're purchasing a home upfront with cash, then you will have equity on your side and a mortgage as a liability. Of course, the longer you pay your mortgage, the more equity you build, and the more each incremental payment will go towards principal instead of interest.

So how can you build equity faster?

Make a Larger Down Payment

For most conventional mortgages a 5% down payment is a requirement, and most mortgages have some form of PMI or private mortgage insurance for any equity less than 20%. With that said, the larger your down payment, the more equity you have at the onset of your mortgage and the shorter the duration you pay PMI.

A larger down payment will also lower your monthly payments and, depending on how aggressively you're paying your mortgage, can potentially help you pay it off faster.

Make Paying Down Your Mortgage a Priority

One of the best ways to get more equity faster is to make paying down your mortgage a top priority. Let's face it, homes and mortgages are a long-term commitment which means paying off a mortgage and building equity can take some time.

In order to prioritize paying down your mortgage, consider paying extra each month. An additional payment of as little as $25 can trim months, even years off of a mortgage and give you an extra $25 per month in equity. Additionally, you can choose to put income tax refunds, gift money, bonuses, or one-time payments toward your mortgage. Finally, consider refinancing to a shorter loan note or a lower interest rate to maximize where your payments go.

Increase Your Property Value

When it comes down to it, many homeowners living in older homes neglect the fact that they can add significant value to their property. Remember, equity is your property value minus any debt. Therefore, increasing property value will inherently increase your equity in your home.

Of course, when many homeowners think about increasing property value, they see the dollar signs following soon after with visions of pricey remodels, extensive work, and days without conventional creature comforts. And while this may be the case, how much you choose to spend will depend largely on how much value certain improvements add to homes in your local region.

Additionally, maintaining your home can be just as valuable as spending in increasing your property value. We're talking about maintaining big-ticket items such as HVAC systems, and other mechanical systems, and staying on top of potential problems including exterior weathering, rot, and pest issues.

Make the Most of Your Equity

No matter what method you choose to increase your equity, make sure your efforts are not in vain. Weigh the pros and cons to attacking your equity on a variety of different fronts. It may work best to mix and match tactics and focus on long-term equity gain as well as making bigger headway in the short term.

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