How to Build Your Home Equity Faster
Equity is the difference between the value of your home and what you owe on your mortgage. It's easy to figure out: simply take your home's current fair market or appraised value and subtract the amount you owe. For example, if you have a home valued at $200,000 and a mortgage balance of $160,000, then you have $40,000 of equity.
Here are a few ways to build equity and pay off your mortgage faster:
Pay Down Your Mortgage
The easiest way to build equity is by paying down the principal on your mortgage. Your mortgage is composed of two parts: principal and interest. Principal is the amount you borrowed from your lender. Interest is what the lender charges in exchange for loaning you money. When you make extra mortgage payments to pay off principal faster, you also reduce the amount of interest on your loan.
For example, making one extra payment on a 15-year, $300,000 mortgage with a 5% interest rate allows you to pay off your mortgage 19 months earlier and saves you about $15,400 in interest on your loan. Refinancing to a shorter-term mortgage — like a 10-year or 15-year loan — can also help you build equity. Typically, these loans have lower interest rates and more of your money goes toward paying down the principal.
Make Home Improvements
Another way to increase equity is through home improvements. Things like remodeling a bathroom or upgrading appliances grow your equity by increasing your home's value. However, make sure your improvements are on the neutral side. For instance, just because you love purple carpet doesn't mean potential buyers will. And if they don't, your improvements may actually decrease your home's value rather than increase it. So, choose home improvements wisely and keep them consistent with your home and neighborhood because not all improvements earn dollar-for-dollar value.
The final way to build equity is through appreciation. When the real estate market is strong, home prices also increase — or appreciate. Even moderate appreciation adds up fast. For example, 5% appreciation means your $300,000 home is now worth $315,000. While appreciation isn't directly under your control, the longer you own your home, the more likely it is to appreciate in value.
*APR=Annual Percentage Rate. Sample 15-year fixed-rate loan of $300,000 based on refinancing an owner-occupied, single family residence at a 3.523% APR and interest rate of 3.50%. Monthly payment of $2,846.65 for 180 months. Loans subject to borrower and property qualifications, not all applicants may be approved. Fees and charges may apply. Effective 7/30/12. Subject to change without notice. Conditions, restrictions, and terms may apply.