A home is the single biggest tangible investment most people ever make. Because we commit so much money to it, we want the home to provide as much equity as possible. This gives us the freedom to sell it if we choose to relocate, as well as making it easy to get cash out for other purposes. The key thing is to understand how to build equity. This process can take many forms, but several common steps will work for any homeowner.
Making a Big down Payment
This gets you started on the right foot. Every dollar you can pay up front is a dollar that you won’t be financing for 20 or 30 years, and it represents an immediate and measurable increase in the equity from the moment you move in. If you pay 15% down instead of 10%, for instance, you have gained 33% more equity.
Increasing Monthly Payments
Putting more money down helps, but you can also accelerate the payoff by increasing your monthly payment. In your first years of a mortgage, most of your payment is interest. If you can double the principal payment during that time, you can greatly shorten the term of your mortgage. Get an amortization schedule to see those numbers and calculate how much extra you can pay.
Refinancing for a Shorter Term
Another option is to make the term officially shorter. There is very little difference in the payments between 20- and 30-year mortgages, so if you can handle the payment on the shorter term, you will save a lot of money interest and build equity much faster.
Making Value-Adding Renovations
Equity is on paper at the bank, but it assumes adequate value is retained. Any upgrades that can improve the home’s durability are beneficial. For example, improved wall cladding can insulate more effectively, provide greater beauty, and increase the durability and value of the home.
Wise consumers know that the money they spend on the purchase and upkeep of a home is not simply lost down the drain. It stays right there in the home, creating a source of wealth for you that you can access for any purpose you choose. The more you do to increase that investment, the more of it you will be able to capture. You will also realize those financial benefits much sooner, giving you more flexibility and freedom in your finances.
