Equity is the difference between your home’s value and the amount you still owe, or simply, it’s your stake in the property. As an extremely valuable tool, equity can provide a cushy nest egg for the future or even cash to put down on your next home. Equity good.
Naturally, your house gains equity over a period of time as you pay down the mortgage balance, or the actual appraisal value of the home goes up. According to a Zillow report, “home values have gone up 7.4% over the past year” and they predict a 3.2% increase within the next year. But there’s no way to predict with certainty the outcome of home values, especially since there’s always the risk of losing equity in a downturn.
Luckily, you don’t have to sit around and wait for your home to gain equity on its own. There are ways to increase your home’s value faster.
Whether your home’s equity increases at a normal pace or a slow crawl, here are four things you can do to build equity sooner rather than later.
If your home is appreciating at a slow pace, you can build equity faster by paying down your home loan quicker. Some people don’t realize the difference an extra mortgage payment can make toward building equity — and paying off a home.
Making one extra principal payment every year can potentially pay off your home loan seven or eight years ahead of schedule. Of course, giving your lender an extra principal payment every year might be a stretch for your budget. But this strategy can work if you use funds from a work bonus or a tax refund. You can also divide your mortgage payment by 12 months, and then add this amount to each future mortgage payment. If your mortgage payment is $1,200 a month, you can make your normal $1,200 payment, and an extra $100 principal payment each month.
Home improvements can add more value to a property than you might realize, and you don’t have to empty your bank account.
“A minor kitchen remodel is one of the best investments homeowners can make,” said Chris Terrill, CEO of HomeAdvisor. “Projects including refinishing the cabinets, updating the countertops and installing new appliances all provide a high return without breaking the bank.”
Other home improvements that add value to a property include replacing garage doors, installing new windows and doors, completing a bedroom addition, a bathroom makeover, and don’t overlook landscaping. According to a survey conducted by HomeGain, an online real estate marketing site, “an investment of around $400 or $500 dollars in landscaping, can bring a return of four times that.”
When buying or refinancing a house, you might automatically choose a 30-year mortgage because you think a 15-year mortgage is out of your budget. But, if you ask your mortgage lender to run the numbers and compare the costs of a 15-year loan with a 30-year loan, you might discover that a shorter term is within reach.
Some people mistakenly assume that a 15-year term will double their home loan payments, but that isn’t the case. To illustrate, if you purchase a $200,000 home at 3.8% interest for 30 years, the monthly payment (excluding taxes, insurance and PMI) will be around $932. Calculate the same mortgage amount and interest rate with a 15-year term and the payment increases to $1,459. This is a difference of $532.
Coming up with an extra $500 a month might be impossible. But if it’s manageable, consider a shorter mortgage term. You’ll not only pay off your house in half the time, you’ll build equity at a much faster rate.
If you have excellent credit, you can get a conventional mortgage loan with a down payment as low as 3%, and an FHA loan with a down payment as low as 3.5%. Buying a property with a low down payment is tempting, especially since you’re able to keep more of your cash in the bank. But if you want to build equity faster, consider putting down a larger down payment — perhaps the traditional 20% down. Likewise, if you’re refinancing your mortgage loan to receive a lower interest rate, avoid a cash-out option. This type of refinance lets you tap your home’s equity, which ultimately increases your mortgage balance. Instead of a cash-out, ask your lender about a cash-in refinance. This is when you bring cash to the table to lower the mortgage balance, and potentially qualify for a better interest rate.