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- Home equity refers to how much you owe on your mortgage compared to how much a home is worth.
- The more equity you have, the better deal you could get when you sell or refinance.
- You can increase your home equity by either paying down your mortgage or boosting the home value.
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The more equity you have in your home, the better. You have plenty of options for increasing your equity. You can find ways to pay down more of your mortgage, or ways to boost your home value.
What is home equity?
Home equity refers to how much of your home you own, financially speaking. If you have a 10% down payment, you own 10% of your home from day one.
To calculate your home equity, subtract how much you owe on your mortgage from the value of your home. Let’s say your home is worth $300,000, and you still owe $250,000 on your mortgage.
$300,000 – $250,000 = $50,000, or 16.67%
Maybe your home value has increased since you bought it, so an appraisal shows it’s now worth $350,000. That means you have more equity:
$350,000 – $250,000 = $100,000, or 33.33%
You do have some control over how much equity you have. Here are five ways to build more equity in a home:
1. Make a large down payment
If you haven’t bought a home yet, you can gain a lot of equity by taking one crucial first step: make a big down payment.
The minimum down payment you’ll need depends on which type of mortgage you get. You could need between 0% and 20%. You may want to place more than minimum, though. The larger your down payment, the more equity you have in your home from the get-go.
A large down payment comes with other benefits, too. Lenders typically reward bigger down payments with better interest rates. If you place more than 20% down on a conventional mortgage, you don’t have to pay for private mortgage insurance.
2. Choose a shorter-term mortgage
The standard mortgage has a 30-year term. But you can choose a shorter term, such as 20, 15, or even 10 years. You’ll pay down your mortgage more aggressively and own the home in full years sooner.
If you already have a mortgage, you could refinance into a loan with a shorter term. For example, maybe you took out a 30-year mortgage, and you have 25 years left to pay. If you refinance into a 15-year term, you’ll shave 10 years off your mortgage and own your home that much sooner.
3. Pay down your mortgage
Every time you make a monthly mortgage payment, you gain a little more equity in your home. As a result, you have more equity in the house after five years of payments than you did when you started.
One way to build equity is to be patient and keep making your monthly payments. But if you want to make significant progress, you could pay extra toward your loan.
There are couple ways to pay extra. You can pay a little more every month, or you could make one or more larger payments toward your mortgage. For example, maybe you get a $5,000 bonus every May for your annual work anniversary, and you put that $5,000 straight toward your principal.
Before making extra payments, check with your lender about any prepayment penalties. You probably won’t pay a a fee for putting a little more toward your mortgage here and there, but you might if you pay off a huge chunk all at once.
4. Make home improvements
Fixing up your home can increase your home’s value. The more value your home gains after you’ve already bought it, the more equity you have.
Improving your home costs money, though. Maybe you want to increase your home value so you can sell it for more money. In this case, spending $20,000 on improvements wouldn’t be useful if it would only increase the value by $5,000.
But some renovations are relatively affordable. For example, you could give the exterior a fresh coat of paint or update the lighting fixtures.
5. Wait for values to increase
Does it look like your neighborhood is becoming nicer overall? Maybe the community has created more jobs, or the housing market is growing more competitive. Your home very well could gain value over time, meaning you’d build more equity over the years.
There are several ways to increase your home equity. Find the one that suits your financial situation best, and you could reap the rewards when it’s time to refinance or sell.
Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews. She is also a Certified Educator in Personal Finance (CEPF). Over her four years of covering personal finance, she has written extensively about ways to save, invest, and navigate loans.
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