Home equity can be a financial safety net. You can tap into equity if you need funds to cover repairs or renovations, pay off high-interest credit card debt or manage unanticipated expenses, such as medical bills.
The amount of equity you have is the difference between your house’s value and the balance you owe on the mortgage. As you pay down your loan, you’ll gradually build equity. If you want to speed things up, there are several ways to build equity faster.
Make a Large Down Payment
You begin to build equity when you buy a house. If you can afford to put down a substantial sum, you’ll own a good chunk of your home outright before you make a single mortgage payment. A large down payment can help you get a loan with a low interest rate. The less you pay in interest, the faster you’ll chip away at the principal and build equity.
Make Extra Mortgage Payments
Paying down your loan ahead of schedule is another way to build equity. Before you send extra money to your mortgage servicer, check your loan documents or contact customer service to find out if your mortgage has a prepayment penalty. If it doesn’t, ask your loan servicer how to have additional funds applied to your principal balance.
One way to make extra payments is to send the loan servicer half of your required monthly mortgage payment when you get paid every two weeks. By paying biweekly, you’ll make 13 full loan payments per year, rather than the required 12. That one extra payment can chip away at the principal and help you build equity at an accelerated rate.
Another approach is to pay more than the required amount each month. Even a little extra, paid consistently over time, can significantly reduce your principal and help you build equity.
You can also pay a lump sum when you have extra funds available. If you get an annual bonus or an income tax refund, you can put some or all of that money toward your mortgage.
Increase Your Home’s Value
Raising your property’s value is another way to build equity. You don’t have to spend a fortune on major upgrades. Minor changes that make a house more comfortable and functional can have a greater impact than large-scale renovations. A local real estate agent can help you figure out which kinds of changes will have the highest return on investment.
Use One or More Approaches to Build Equity
Since home equity is the difference between your house’s value and the amount you owe on the mortgage, there are numerous ways to build equity. You can focus on reducing your loan balance, boosting your home’s value or both. Find an approach that fits your budget.
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