Equity is the difference between the market value of a property and the balance of an outstanding loan. Your home’s equity is important because it can be easily converted to cash through a line of credit or a loan. To increase a home’s equity, a homeowner must increase its value, reduce debt, or do both. Here are five ways to build equity in a home.

Make a bigger down payment

A down payment or deposit provides quick equity, and the larger the amount, the better off the owner is. Additionally, those who deposit 20% or more can avoid paying the costs of private mortgage insurance or PMI. You can learn more at Fellowship Home Loan on how to assess your finances and goals when deciding how much to offer as a down payment.

Pay the mortgage faster

The mortgage payments cover the interest and principal on the loan. Most home loans have repayment schedules in which homeowners make equal payments for a specified period until the loan is paid off.

Generally, a larger portion of each month’s payment goes to interest up front, and a larger amount goes to principal over time. Those who can afford it should consider paying more than the minimum required amount each month. By doing so, the loan balance decreases more quickly and the equity increases along with it.

Consider a short-term refinance

Refinancing to a short-term mortgage will help the homeowner build equity quickly. With a 15-year home loan, interest rates are lower and more of each payment goes to principal rather than interest.

This generates more equity each month than you would with a 30-year home loan. However, it is important to remember that such a loan carries higher monthly payments and homeowners should budget accordingly.

Make improvements to the property

Home improvement and remodeling projects can also increase equity. Many popular upgrades offer a return of approximately 65 cents for every dollar spent. Smaller jobs like garage door installation increase equity quickly when paid for in cash.

Unless you’re renovating with sales plans, it’s crucial to consider how much the upgrade will improve your daily home experience. Consult a real estate agent or renovation expert to determine which upgrades will offer the highest returns.

Wait for the housing market to improve

If you’re not in a rush to build up your home equity, it’s best to be patient. Today’s housing market is in a state of transition, and your home’s value may increase as the market improves. Similarly, if the market falls, the value of your home may decline and you will lose equity. While it is impossible to control or predict the market, it is important to keep that in mind. Use an online tool or consult an appraiser for a home value estimate at any time.

In conclusion

Home equity is an important part of a secure financial future. If you are thinking about buying or refinancing a home, contact one of our loan specialists today to get started.

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