These days, home equity is booming.
At last glance, total equity on mortgaged properties was around $10 trillion, with about $6 trillion of it tappable, per recent figures from Black Knight.
Yes, that’s a “T” not a “B.” But you would of never guessed it just a few short years ago.
The whole using your house as an ATM thing to make lavish purchases or even just pay the bills each month.
As a result, the narrative quickly changed to declining equity, negative equity, underwater mortgages, loan modification programs, foreclosures, and so on.
Funny how that works…
This reversal of literal fortune was caused by crashing home prices and zero down mortgages, many of which weren’t properly underwritten to begin with.
Most of those who got into 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.
This caused lots of homeowners to leave or think about walking away, as home price deprecation was found to be the leading driver of default.
But many of those who stuck around and rode it out are actually in great shape, and even better positions than when they first took out their mortgages.
However, others are still feeling the negative effects of the housing crisis, even after years of double-digit home price gains.
If you’re one of those homeowners, or even if you’re not, you may be wondering how to build some home equity.
That way, when it comes time to sell your home (or refinance your mortgage), 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 climb higher, you will gain equity simply because your property will be worth more.
For example, if your home is currently worth $100,000, and then rises to $125,000 in five years, you’ll have $25,000 more equity. Unfortunately, the opposite can also occur, as we all now know.
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. Simple and effective.
4. Biweekly mortgage payments – you can even go with a biweekly mortgage payment plan, where you make 26 half 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. Shorter 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 at a much higher rate 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 owning a home that’s worth more.
While it’s seemingly the same exact house, quartz countertops and stainless steel appliances still draw buyers in, and you might be able to sell for more.
You can even do it for free if it’s your own sweat equity.
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.
Home buyers often hit sellers with repair requests, but it’ll be more difficult to ask for concessions if you took great care of your home
9. Curb appeal – same goes for home 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, plants, flowers, and even basic cleanliness or a lack of clutter.
10. Rent it out – if you rent out part or all of your property, it’s possible to build equity via the rent you receive from your tenants each month.
Having someone else pay off your mortgage is pretty sweet, especially if the property appreciates at the same time.
11. Bigger down payment – finally, you can make a larger down payment at the outset to automatically acquire home equity and build it faster.
While this may seem like you’re putting money in an illiquid investment, more equity means a lower loan-to-value ratio, which may equate to a lower interest rate, no mortgage insurance, and easier-to-obtain financing.
Over time, that lower mortgage 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.