How to build your equity
Here are six ways your home can create wealth for you. Some require time, money — or both. A lender can help you decide what works best for you.
1. Let your home appreciate
Building equity through appreciation can take little time or a lot, depending on the market. With home prices going up like they have in recent years, appreciation has been a boon for many home owners.
2. Make a larger down payment
You can do this but, as we’ve seen, waiting to save extra cash can go against your broader financial interests if you lose the chance to build equity through appreciation. Therefore, you must strike a balance among down payment, monthly budget and savings for other priorities. A good lender can provide rate and market insight to help you do this.
3. Use financial windfalls
Take advantage of work bonuses, family gifts and inheritances to pay down your mortgage. If you do pay down in lump sums, see if your lender will recalculate (or “recast”) your payment based on the new, lower balance.
4. Make biweekly payments
Make mortgage payments every two weeks instead of once a month. Over the course of a year, this will add up to 13 monthly payments instead of 12. You’ll build equity faster and shave five to six years off a 30-year mortgage. Just make sure your lender isn’t charging extra for processing semimonthly payments.
5. Cut your loan term in half
Take out a 15-year mortgage instead of a 30-year mortgage, and you’ll build equity twice as fast. Two caveats here: You’ll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying.
6. Make home improvements
New appliances or cosmetic features like paint are unlikely to increase value. Only big improvements like new kitchens, or additional bathrooms or other rooms will add meaningful value. Make sure the cost of such improvements will create the added value you’re looking for.
How to use your equity
You must borrow or sell your home to use your equity. The three most well-known ways to get to your equity through borrowing are a home equity line of credit (HELOC), home equity loan or cash-out refinance.
Rates are rising right now, so these borrowing options might cost more in the future. Talk to your lender to determine the best approach for you.