You can build equity by increasing your property value or decreasing the amount of debt you own. If you make your loan payments in full and on time, you will slowly build equity in your home. However, it’s possible to build your home equity faster.
PLAN TO PAY MORE TOWARD YOUR PRINCIPAL BALANCE
You’ll pay off your over the pre-determined, fixed period of time (usually 15 or 30 years). As you make payments, your principal balance decreases, which is what we’ve already learned is how you build equity. You can increase how quickly you’re gaining home equity by making extra mortgage payments, or paying more than you owe each month.
If you make one extra payment a year, you could potentially pay off your loan ahead of schedule. You could also pay $X more than your required payment each month to get ahead. For example, let’s say your monthly mortgage payment is $1,200. $1,200 divided by 12 is $100. If you had $100 to your monthly mortgage payment, you will have made one extra payment after 12 months, shortening the life of your loan and building more equity.
Note: Be careful. Some loans have prepayment penalties, and you could be penalized if you pay off too much of your loan ahead of schedule.
USE BONUS MONEY, GIFT FUNDS, ETC. WHEN YOU CAN
This goes hand-in-hand with paying ahead of schedule. If you don’t want to commit to $X more a month or one extra payment a year, just pay extra when you have the funds available. This might be when you get a holiday bonus at work, or when you get your tax returns. Maybe you make it your goal to put any overtime pay you make toward extra mortgage loan payments.
Maybe you’re lucky enough to inherit some money. You could also put that toward extra payments. However, when you make extra payments, make sure the money is going toward your principal, not your interest. Talk with your mortgage lender to clarify.
COMPLETE HOME IMPROVEMENT PROJECT
From a minor bathroom remodel to a major kitchen renovation, a home improvement project can add significant value to your home and therefore, increase the equity you have in your home. Even an investment of a few hundred dollars could bring a huge return in the home’s value.
CHOOSE A 15-YEAR LOAN RATHER THAN A 30-YEAR LOAN
A common mortgage choice is a 30-year mortgage loan, which means you pay back the loan over a 30-year period, but there is also a 15-year loan term option. You can compare the monthly mortgage payments and costs associated with a 30-year versus a 15-year mortgage with your mortgage lender to see if a 15-year mortgage loan is within your budget.
It’s not that simple. For example, if your loan amount is $200,000 with 4% interest for 30 years, your monthly payment before private mortgage insurance (PMI) and taxes and any potential HOA fees will be about $955.
For that same loan over 15 years, your monthly payment before PMI and taxes and HOA fees will be about $1,479. That’s a difference of $524, which might seem impossible. However, the shorter loan term means you’ll be paying less interest over the life of your loan term with a 15-year loan than with a 30-year loan. Not to mention, you’ll build equity in your home faster with the shorter loan term.