Looking to create wealth through homeownership? You’ve probably heard that one of the advantages of buying a home is the opportunity to build equity. But how exactly do you build it? Let’s take a closer look at the basics of equity. 

What is equity?

Home equity refers to the percentage of your home’s value that you own, free of debt. If you take out a mortgage, equity is ultimately the difference between what you owe on your mortgage and what your home is currently worth. Every month, you slowly pay down more and more of the loan you owe on your home. Depending on how fast you are paying off your mortgage, it can typically take a homeowner between five to seven years to build up. 

Your equity can increase in multiple ways. Below, we dive into the different ways you can build wealth through homeownership. 

Larger Down Payment

One of the fastest ways to build home equity is to pay a sizeable down payment. Ultimately, the larger the down payment, the more ownership you will immediately have in your home, reducing your overall debt.

Increase Mortgage Payments

If you don’t have the extra money upfront for a large down payment, you can increase your mortgage payments. Paying more can be a good option if you know you will stay in the house for years to come. When making your mortgage payments, a portion will go toward paying down the principal balance of your home loan, and the rest will go toward paying interest. When you increase your payments, the amount of interest you are paying goes down, and a more substantial amount begins to go toward the principal. Whether you pay an extra $100 a month or an additional payment each year, you’ll be able to decrease your loan’s principal balance and build equity faster.

Shorter Loan Term 

Selecting a shorter loan term allows you to pay larger amounts on your home and build equity. In addition, a shorter loan term usually has lower interest rates. You can take out a 15-year mortgage or refinance into one from a 30-year loan. Keep in mind, there is a catch: your monthly payments will be higher. 

Home Improvements

You can help boost your home’s value by adding an extra bathroom, renovating your kitchen, or remodeling your basement. Unfortunately, smaller improvements like paint or new appliances are unlikely to increase the value. Investing in landscaping upgrades and creating better curb appeal can also help. 

Home Appreciation 

As a homeowner, you don’t have much control over how much property values appreciate. Home appreciation occurs when your property value naturally rises, without having to make any home improvements. Appreciation relies heavily on the current state of the local market. 

Building home equity is the great benefit of becoming a homeowner. If you have any questions regarding your home equity, contact us!