How to Build Equity in Your Home

A house is a big investment, one you want to see grow in value. Building equity in your home is important for your financial future. But how long does it take to build equity? The truth is, it takes time and there are factors that you can’t control — like the housing market. These six suggestions can help increase the equity in your home. 

1. Understand What Home Equity Is

What is equity in a home? Home equity is a property’s current market value minus any liens or debt attached to the property. A simple way to determine how much equity you have is to subtract what you owe on the house from the market value — the amount left over is your equity.

Building equity in a home is a good thing because it represents more than a mortgage being paid off. Home equity can represent an asset you can borrow against to meet other financial needs — i.e., a form of collateral you can leverage if needed.

2. Choose a 15-Year Mortgage

One way to build equity in a home is to choose a 15-year mortgage instead of a 30-year mortgage. It’s a strategy that can increase equity because you’ll pay a lower interest rate, and for a shorter amount of time. This means you’ll save more of your hard-earned cash by paying less in interest. Do know, however, that on a 15-year mortgage your monthly payment will be higher, but you’ll save big in the long run and be on your way to building equity faster.

3. Make a Larger Down Payment

If you make a bigger down payment when you buy your home, you’ll have more equity in it. Larger down payments will give you a smaller mortgage loan balance, creating additional cushion that will let you keep building equity when the market value slips. If you put down at least 20 percent, you won’t have to pay private mortgage insurance (PMI). Less fees means more money goes to paying off your home. 

4. Pay Down Your Mortgage Earlier

How can you build equity in a home…faster? If you can make larger monthly payments, you can build equity at a quicker rate. It’s a good move for two reasons: You’ll be on the path to paying off your mortgage early, and the extra amount will help build equity in your home. You’ll also save more in the long run by relieving yourself from paying more in interest. Even bumping up your monthly payment by a few hundred dollars can make a big dent in paying down your mortgage faster. Just be sure the extra payments are set to go to the principal.

5. Pick the Right House

When you’re searching for the “perfect” house, it’s important to consider the financial factors that could cause equity to grow at a slower rate. For example, if you buy a house at the high end of your budget, you may not have extra money to put toward building equity faster. Avoid any large losses you might incur as a result of choosing a home in a less desirable neighborhood, missing payments or repeatedly taking out loans.   

6. Make Small Home Improvements

Investing time and money into the upkeep, improvement and update of your home can be a good strategy to Investing time and money into the upkeep, improvement and update of your home can be a good way to add value and equity, especially if you’re able to make the improvements on your own. For example, if your kitchen is outdated, a fresh coat of paint or a simple fix to improve functionality may add value to help build equity. Be strategic: Sinking a large amount of money into home improvements doesn’t always pay off.

Protecting Your Home

With all the energy that goes into owning and improving your home, you want to know it’s properly protected. Your local Farm Bureau agent can help ensure you have the right coverage to protect your home.