Equity is so important when you own a home. If you took the natural course of action, you’d wait a long time to see a return on your investment. A
report conducted by Zillow recently showed a 6.9% increase in home values over last year. That’s no way to build home equity fast.
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That means if you own a home worth $150,000 last year, it might be worth $160,000 today. $10,000 is a lot, but when you’re talking about a home, that $10,000 can get eaten up pretty quickly. What if there was a magical way to increase your equity faster?
While they might not be magical – here are 4 tried and true ways to enhance your investment.
Pay More Principal to Build Home Equity Fast
You took out a mortgage for a specific amount; it’s probably the amount you can afford. But, what if you were able to pay just a little more each month? Did you know that it could help you build home equity fast? It doesn’t have to be a lot or it can be if you want. The key is that you are consistent. In the end, you could knock 5 – 10 years off your mortgage. This means thousands of dollars in interest is saved and you gain a lot in equity.
Here are a few simple ways to pay more principal:
- Pay a little extra each month – Even $100 each month can have a drastic impact on your mortgage’s bottom line. $100 a month for 12 months is $1,200 for a year. After just 5 years, you’d pay $6,000 on top of the appreciation your home experiences.
- Pay 1/12th of your mortgage payment each month – In addition to your current mortgage payment, consider adding 1/12th of that amount. Let’s say your mortgage payment is $1,500. If you added $125 to that amount, you’d make an extra mortgage payment each year without really trying. This can knock several years off the term of your loan.
- Pay your mortgage biweekly – If your lender allows it, make ½ of your mortgage payment every other week. This way you make 13 mortgage payments per year rather than 12. You pay the same amount, you just cut your payment in half.
- Put your windfalls toward the mortgage – If you receive a large bonus or tax refund, put it towards your loan’s principal. This knocks it down significantly all at once. If you do this a few times during the loan’s term, you can really build up equity fast.
As you can see, there’s no rule as to how you pay more principal. You do what works for you. If you can’t afford to do it every month, only do it when it’s feasible. Every penny counts towards helping you build equity.
Refinance Into a Lower Term
If you took out a 30-year loan, you pay a lot of interest. Not only do you pay a higher interest rate, but you stretch out your loan so that a majority of it is interest. If you haven’t compared the total interest paid on a 30-year loan to a 15-year loan, you might be surprised to see the results.
Here we’ll look at a $150,000 loan with a 4% interest rate.
- 30-year total interest paid – $107,000
- 15-year total interest paid – $49,700
Wouldn’t you rather put your money to good use and pay the principal down rather than excessive interest? Maybe you couldn’t afford the 15-year payment initially. If you can now, though, consider refinancing. If you don’t want to refinance, you can always make the 15-year payment each month. This will knock down your principal faster and help you avoid overpaying mortgage interest.
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Make a Large Down Payment
This trick requires some planning. If you know you want to buy a house, try to save for a large down payment. Even though there are programs, such as the FHA program, that only require a small down payment, put down more. You can use the FHA program if you need flexible financing, but put more money down.
Let’s say you want to buy a $200,000 home. The FHA loan would require you to put down $7,000. That doesn’t give you a lot of equity. If instead, you put down $20,000, you’d have 10% equity right off the bat. You’d start ahead of the game already.
Improve the Home
One last way you can build equity fast is to
improve the home. Talk to a local real estate professional to see what values certain upgrades have, though. Don’t think you have to go and demolish your kitchen and start over. Oftentimes large upgrades don’t have the same impact as smaller tasks do.
Here are a few of the most profitable home improvement tasks you can do:
- Minor bathroom changes – Change out the toilet, re-caulk and glaze the tub, and update the wall coverings and you could see a tremendous difference in your home’s value.
- Update the curb appeal – There’s a lot to be said about a neat looking home from the exterior. Fix the paint and chipped shingles and add some landscaping. You’ll likely see a 100% return on your investment for these costs.
- Cosmetically update the kitchen – Don’t knock down walls or rearrange the floor plan. Instead, update the walls and appliances. You’ll see the greatest return on your investment this way.
- Add a wood deck – Adding usable space outdoors can often add value to your home. You should expect to receive about 3/4ths of your investment back in home value.
As you can see, you don’t have to do anything major. Yes, you’ll have to lay out some money up front, but you’ll be rewarded with home equity in the end.
You can build home equity fast if you are methodical and diligent. You can’t just sit back and wait for the home to appreciate. As we all saw with
the housing crisis, values can fall in an instant. Instead, you’ll have to put your own work into it.
Whether you pay more money towards your mortgage or you put in the sweat equity and take that route, you’ll eventually meet your goals. Home equity can be a great investment and even emergency fund should the need arise. There are many uses for home equity, even if you save it for when you retire. Start now building your home equity and you’ll reap the rewards when you need them.
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