It doesn't feel like it, but when you send off your mortgage payment every month you’re actually saving money. How’s that possible? Well, a little thing called equity increases with each payment you make.
Equity is the difference between your home’s market value and the amount you still owe. To calculate your equity you can subtract your mortgage balance from your home’s market value.
You can look at equity like a safety net. It can be converted to cash or used to finance a home equity loan or a home equity line of credit.
Building up equity can feel very satisfying for homeowners. And here’s the best part, there are ways to accelerate the speed of your equity’s growth.
5 Ways to Build Equity in Your Home
Equity can be built by either increasing your home’s value or reducing your mortgage debt. Here are our favorite ways to build equity.
- Start with a big down payment. Starting off with a large down payment gives you equity right off the bat. Some mortgages allow for down payments as small as 3%, but a bigger down payment will help you avoid private mortgage insurance (PMI) and jump start your equity.
- Increase the value of your home by making home improvements. Homeowners in 2020 could expect to see a 66.5% return on home remodeling projects. But not all home improvement projects are created equal. Megan Ryan of the Zimmerman Group recommends the following projects for the best ROI:
- Anything that adds square footage like a basement remodel or home addition.
- Step up your curb appeal with attractive landscaping, upgraded siding, or a fresh coat of paint.
- Install or refinish hardwood floors.
- Replace your roof. It may not sound fun but you can see 107% recovery on the cost at resale according to NAR.
- Make energy-efficient upgrades to your windows, appliances, and plumbing fixtures.
- Pay more on your mortgage. If you can afford it, it’s a great idea to make extra payments toward the principal of your mortgage. You can add a few hundred dollars each month or even make double payments.
- Refinance to a shorter loan term. Shorter loan terms typically have lower interest rates. Since payments are higher with a shorter term loan you’ll be building equity quicker.
- Use bonuses and windfalls to pay a portion of your mortgage. Instead of putting a yearly bonus or an unexpected inheritance into your regular savings account, you can use that money - or a portion of it - to pay down the principle of your mortgage.
Building equity, especially when it’s done through paying down the amount of your mortgage, is really like building savings. You may not be putting cash in the bank each month, but you are building up the value of an important asset - your home.