3 Ways to Build More Equity in Your Home
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Home equity is a good thing to have. Here's how to increase yours.
You'll often hear that home equity is a good thing to have. But why? And what does home equity even mean?
Home equity refers to the portion of your home you own outright. If you have a home worth $300,000, but you owe $200,000 on your mortgage, you're left with $100,000 worth of equity. Or, to put it another way, you calculate equity by taking the market value of your home and subtracting your mortgage balance.
Home equity is a valuable thing to have because you can borrow against it when you want or need to. Say you're faced with an emergency expense and don't have money in savings to cover it. If you have enough equity in your home, you can borrow against it to access the cash you need.
There are different things you can do to increase the amount of home equity you have. Here are some options you may want to look at.
1. Make a larger down payment at closing
It's often advisable to make a 20% down payment when you buy a home. That way, you won't have to pay private mortgage insurance (PMI), a costly premium that makes owning your home more expensive.
But some mortgage lenders will let you put down less than 20% at closing. You may be able to buy a home with just 5% down, or 10% on a conventional loan. But the more money you bring to your closing, the more home equity you'll start to build, since you'll own more of your home outright.
2. Pay down your mortgage at an accelerated rate
Once you sign your mortgage, there will be a specific payment you'll need to make each month. But that doesn't mean you can't pay more. If you put extra money into your home loan on a monthly basis, or if you make different lump-sum payments into your mortgage as you get your hands on added cash (such as when you get a tax refund or bonus at work), then you'll chip away at your loan's principal. The result? More equity for you.
3. Stay in your home for a number of years
Homes have a tendency to rise in value over time. So if you stay in the same home for a number of years rather than move every few years, you'll have an opportunity to build more equity.
Say you buy your home for $300,000. If, after 10 years, the value of your home increases to $350,000, you'll automatically boost the amount of equity you have by virtue of that increase.
Having more home equity gives you a world of options. When you have a lot of equity in your home, you can often borrow money affordably when you need to via a home equity loan or line of credit.
Having extra equity also allows you to take advantage of cash-out refinancing, which is another affordable way to borrow when mortgage rates are low. It pays to do what you can to build equity in your home to buy yourself as much financial flexibility as possible.
Our Research Expert
Maurie Backman writes about current events affecting small businesses for The Ascent and The Motley Fool.
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