If you look at your house as an investment, you probably want it to build equity fast. If you think about it, your home is like a forced savings account. You have to make your payments each month in order to avoid foreclosure. A portion of that payment will cover the principal, which reduces how much you owe on the home. As your home appreciates and you continue to pay more money towards the mortgage, your investment grows. You don’t have to worry about transferring money to a savings account or investing your funds in the market.
Many people wonder, though, how can they build equity faster? Here are a few good tips.
Don’t Borrow the Maximum Amount Allowed
You can start the homeownership process off well by putting down a large down payment. Let’s say you use FHA financing, just as an example. This program allows you to borrow as much as 97.5% of the home’s value. If you do borrow that much, it’s going to take some time for you to build equity in the home. The first few years of your mortgage payment will mostly cover the interest on the loan. It’s not until a few years down the road that you really start hitting the principal. Even then, it’s going to take time to get a decent amount of equity in the home.
When you make a large down payment, you give yourself sort of a head start on the process. Let’s say you put 20% down on the home. That means you have 20% equity from the start. Now you start making payments and paying that principal balance down even further. Before you know it, you’ll have a decent amount of equity available.
Make Home Improvements
If you have the cash available, go ahead and make home improvements. But before you do, talk to a professional appraiser. Find out if the changes you will make will have any effect on the home’s value. For example, kitchen and bathroom remodeling usually has a good effect on a home’s value. Adding a pool or other luxurious amenity, however, may not.
Don’t waste your money on home improvements that won’t improve the home’s value if your intent is to gain more equity in the home. Sometimes even small projects are better because they offer a greater return compared to what they cost, giving you a better return on your investment.
Make Extra Payments on Your Mortgage
Do you have extra money each month that you can put towards your mortgage? You can do this consistently or on a sporadic basis. No matter how much you pay or how often, you’ll hit the principal of the loan balance even faster. Here are a few good ways to hit the principal:
- Pay an extra $100 every month
- Divide your mortgage payment by 12 and pay that amount each month
- Make one full extra mortgage payment once a year
- Apply any windfalls or bonuses directly to your mortgage principal
Eventually, the extra payments will allow you to have more equity in the home at a much faster rate.
Make 15-Year Loan Payments
Even if you have a 30-year mortgage, you can make 15-year payments. All you need is a mortgage calculator to help you figure out the payment. Enter the principal balance of your loan and the interest rate you pay. Make sure you choose the 15-year term or 180-month term. Once you have the payment amount, you can start making that payment towards your mortgage. This will get the principal balance of your loan paid down at a much faster rate, which immediately means more equity in the home.
As an added bonus, you’ll pay less interest on your loan over the lifetime by paying the principal down faster. You will not only have more equity, but you’ll also have more money in the bank as you have to pay less interest on the loan.
These tips are simple enough that anyone can do them. You have to figure out where you stand financially. Can you make the larger down payment? Do you have extra money each month to put towards the mortgage? Can you make 15-year payments? Once you analyze where you stand, you can then determine the best course of action to earn more equity in your home.