How to Build Home Equity

When you build equity, you build wealth. Shutterstock

Most people’s biggest asset is their home. And one of the benefits of owning a home is building equity. Equity is power. You can borrow against it or make a profit when you sell your home.

Building equity may seem elusive, but there are ways to do it. Some require a little discipline, while others depend on the market. Either way, building equity is possible.

How Home Equity Works

When you buy a house, ownership is shared with the lender. If you put 20 percent down on the home, you own 20 percent of the house, which is equity. As you make payments, your share of the ownership grows.

Building home equity is a lot like investing in bonds. It’s a long-term instrument. But your money is locked up to a certain extent and not spendable.

Building Home Equity

There are both quick and long-term ways to build home equity. It takes patience and some discipline, but the result is financial flexibility. Here are some ways to build equity.

1) Large Downpayment Makes Equity Immediate

When you make a large downpayment, you immediately own a larger share of your house. That’s equity.

You’re required to put down a minimum down payment. According to Zillow, an FHA loan requires 3.5 percent. But for most down payments, 20 percent is ideal. However, 58 percent of mortgage buyers in 2022 put down less than 20 percent.

But the larger the down payment, the more equity you'll instantly have.

The downside is that cash will be coming out of your pocket upfront. It can sometimes cause financial harm. This is especially true if you are unaware of the cost that a home takes to run.

2) Eliminate Private Mortgage Insurance

Private mortgage insurance (PMI) is a monthly payment that is tacked on if you have less than 20 percent equity. This protects the lender if you default. These payments are monthly and add up over time.

Paying a PMI reduces the amount of your overall monthly payment that goes toward the mortgage’s principal. The result is, it takes you longer to start building equity.

Try to avoid PMI in the first place, if you can, by putting a larger down payment on your home.

If you have PMI, make your mortgage payments until you reach the 20 percent and then ask for it to be removed. Keep an eye on the housing market. Appreciation of your home may give you more equity and leverage when you ask to forgo the PMI.

3) Go for a Shorter Loan

Refinance from a 30-year to a 15-year mortgage. Your payments will increase, but it will reduce the amount of interest you’d pay over the loan’s lifetime.

More of your payments will go toward the principal instead of toward interest. The best part is you’ll own your home sooner.

The downside is that you'll need to pay closing costs on the new loan. Between the closing costs and the higher payment, ensure you are financially able to handle the monetary strain.

4) Biweekly Mortgage Payments

Switching to a biweekly mortgage payment adds one extra payment to your mortgage per year.

Instead of paying one mortgage payment monthly, you make two. Since there are 52 weeks in a year, you end up making one extra payment per year, or 26 payments. That’s because you’re paying every other week.

When you make one payment per month, you end up making 12 payments, but when you make two payments a month, you end up making 13 full mortgage payments.

This extra payment will reduce your loan repayment by years. This biweekly mortgage calculator will help you decide if it is worth it.

5) Increase Home’s Value

There are several ways you can increase your equity. One is improving your home. By making home improvements, you should be able to increase the home’s value.

But do the research and plan any upgrades. Check the neighborhood comparables to see what homes with your upgrades are selling for. You don’t want to go through the trouble of adding an expensive outdoor space just to find out it doesn’t affect the home’s price.

Also, consider your finances. If you break the budget on home improvements, you defeat the purpose of having the equity increase your net worth.

6) Real Estate Market

Barring a significant economic downturn, eventually real estate appreciates. By waiting for the market value to increase, you’ll earn equity.

This goes back to treating your home with the same strategy as you would a bond.

Many factors can contribute to an increase in your home’s value, including the following:

• Nearby homes’ comps
• Housing supply and demand
• Commercial development

Any one of these factors could contribute to your home’s value. But on the flip side, they can also send your home’s value on a downward trend.

Equity Builds Financial Stability

When you build equity, you build wealth. You can tap into it or wait and make a profit when you sell. There are several ways to build equity. Based on your circumstances, be proactive in building equity.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.