10 Ways to Build Home Equity

October 18, 2011 1 Comment »
10 Ways to Build Home Equity

These days, home equity is all the rage. During the housing boom, it was all about tapping into your home equity with a line of credit or a refinance.

The whole using your house as an ATM scheme to make lavish purchases or even pay the bills.

But nowadays, it’s all about a lack of equity, negative equity, underwater mortgages, and so forth.

Funny how that works…

This reversal of fortune is a direct result of crashing home prices and zero down mortgages.

You see, many of those currently in trouble purchased homes at the height of the market at unsustainable prices, while at the same time relying on 100% financing to get the deal done.

As a result, they now find themselves between a rock and a hard place. Or whatever’s worse than that…

This has caused many to leave or think about walking away, as home price deprecation is the leading driver of default.

But what if you actually want to stick around and ride it out? Well, you may be wondering how to build some home equity so when it comes time to sell (or refinance), you can do so without worry.

Let’s look at the many ways you can build equity in your home:

1. Rising home prices – when home prices eventually turn around (I hope), you will gain equity simply because your home will be worth more. For example, if your home is currently worth $100,000, if it rises to $125,000 in five years, you’ll have $25,000 more equity. Unfortunately, the opposite can also occur.

2. Falling mortgage balance – as you pay off your mortgage each month, you pay a portion of interest and a portion of principal (assuming it’s not an interest-only home loan). Every time you make your mortgage payment you’ll gain some home equity.

3. Larger mortgage payments – if you make larger payments each month, with the extra portion going toward principal, you will pay off your mortgage much faster and gain home equity a lot quicker.

4. Biweekly mortgage payments – you can even go with a biweekly mortgage payment plan, where you make 26 payments throughout the year. This will shave down your mortgage term, save you a ton in interest, and help you build home equity a lot faster.

5. Shorten mortgage term – you can also refinance into a shorter-term mortgage with a lower mortgage rate, such as a 15-year fixed, which will increase the size of your payments, but build equity much faster than a traditional 30-year mortgage.

6. Avoid refinancing – conversely, if you don’t refinance and pull cash out, you’ll retain all the equity in your home. During the boom, many homeowners refinanced over and over until they sucked their equity dry.

7. Home improvements – if you make smart home improvements, where the expected value exceeds the cost, you’ll increase your home equity by having a home that’s worth more. While it’s seemingly completely played out, granite countertops and stainless steel appliances still draw buyers in, and you can sell for more.

8. Maintenance – keep your home in tip-top shape and you will be rewarded when it comes time to sell. If you can unload it for more as a result, you’ve essentially created more equity in your home.

9. Curb appeal – same goes for staging. Make your home look good when you list it and there’s a better chance it’ll sell, and sell for more. Simple things can make a big difference, such as new paint, carpet, bright lighting, cleanliness, plants, flowers, etc.

10. Bigger down payment – finally, you can make a larger down payment at the outset to automatically acquire home equity. While this may seem like you’re putting money in an illiquid investment, more equity means a lower loan-to-value ratio, which equates to a lower interest rate and easier-to-obtain financing. Over time, that lower rate will mean less interest paid and more equity accrued.

Bonus: If you happen to be an underwater homeowner, get the bank to grant you principal forgiveness and you’ve essentially built home equity, even if you’re still just above water as a result.

One Comment

  1. Lyle July 22, 2013 at 3:49 am -

    I have tenants in one of my properties – they pay me more than the total monthly housing payment, so I use the excess to pay down principal, which in turn increases my equity stake and reduces my interest expense. Love it!

Leave A Response