Building home equity faster is a smart financial goal for many homeowners because it can increase wealth and financial security.
Home equity is the portion of your home that you already own. It is the difference between your home’s current market value and your mortgage’s unpaid balance. Therefore, home equity = Current Market Value of your Home – Mortgage Balance.
The equity of your home increases as you pay down your mortgage, and your home’s value rises. Whether you need equity for home improvements, to build wealth, or investment opportunities, many effective ways exist to expedite building home equity.
Increasing home equity is a gradual process that differs from one homeowner to another. The exact time it takes to build equity on your home varies depending on your mortgage terms, your financial habits, and the real estate market conditions.
Short-term home loans with larger down payments build equity faster than long-term home loans. A good credit score and timely monthly payments should make you build sizable home equity in five to 10 years. But you can build home equity faster!
This guide will explore ways to help build your home equity faster and secure a stronger financial future.
1. Make Extra Mortgage Payments
Making extra payments toward your mortgage is one of the most direct ways of boosting home equity. Paying more than your monthly installment reduces the principal balance faster, leading to higher equity and shorter loan duration.
- Bi-Weekly Payments. Paying half the monthly amount every two weeks instead of once a month adds one extra payment per year. There are 52 weeks in a year. Making 26 half-payments equals 13 total payments a year instead of 12 payments if you pay monthly.
- Additional Principal Payments. Earmark your extra funds for payment of the principal balance. Small, frequent extra payments make a significant difference over time.
- Round Up Payments. Round up your monthly payments to the nearest hundred or thousand dollars. This strategy can substantially reduce your mortgage balance.
Before making extra payments, check with your lender to ensure there are no prepayment penalties.
2. Refinance Your Mortgage
Refinancing your mortgage is a savvy strategy to build home equity faster. Refinancing your home loan aims to secure a lower interest rate, which translates to lower monthly payments.
If you make the same monthly payment (original home loan), more of your payment will reduce the principal balance, thus fast-tracking the growth of your home equity.
Refinancing also allows you to choose a shorter loan term. Opting for a 15-year instead of your original 30-year mortgage means higher monthly payments but faster home equity growth.
Greater Alliance Federal Credit Union provides the best services if you are considering a mortgage refinance.
3. Invest in Home Improvements
Home improvements can increase the value of your home, boosting home equity. Focus on projects that have a good return on investment, such as:
- Bathroom upgrades
- Kitchen renovations
- Energy-efficiency improvements
- Curb appeal enhancements
- Painting jobs
No matter how many years you have left on your mortgage, an increase in the market value of your home builds your home equity faster. Remember the formula: Current Market Value of your Home – Mortgage Balance = home equity? So, an increase in market value means an increase in your home’s equity.
If you have the budget, improving the insulation, replacing outdated windows, or doing a simple painting job can increase your home’s market value. Prioritize which home improvement project suits your immediate need and market conditions in your area.
4. Remove Private Mortgage Insurance (PMI)
Primate mortgage insurance (PMI) is a type of mortgage insurance. The primary purpose of PMI is to protect mortgage lenders from financial losses in case you default on your mortgage.
You need to buy PMI if you take out a conventional loan (a loan not part of any government program) and your down payment is less than 20% of the purchase price of your home. PMI is an additional cost and does not contribute to your home equity.
While PMI does not last forever, its cost can add hundreds of dollars to your monthly mortgage. Your PMI is recalculated every year based on your current loan balance. So, the cost of your PMI decreases as you pay down your loan until it vanishes altogether.
Without PMI premiums in your monthly payments but still paying the same amount, all payments will go to the principal balance, contributing to faster home equity growth. This method is a variation of the “make extra payments” strategy without the additional monthly expense.
How fast you can reach the 20% threshold to remove PMI depends on your down payment and these factors:
- Extra payments towards your mortgage principal fast-track the process of building equity.
- Increasing your home value due to improvements or market appreciation also increases your equity.
- A good payment history.
Regularly check the value of your home and mortgage balance. Keep track of when you are eligible for PMI removal. You can request for the removal of PMI once you have enough mortgage payments to reach 20% equity in a conventional loan or your home appreciates.
Some lenders do not automatically cancel your PMI at 20%, so you may have to request cancellation. If you do not request cancellation, the law requires the lender to cancel your PMI at 22% home equity automatically.
5. Keep Up with Regular Maintenance
Proper maintenance of your home is crucial to preserving its value. When you do not care for minor issues, they can become significant problems and reduce your home’s value.
Regular maintenance ensures the market value of your home remains as high as possible. Simple tasks such as repainting, fixing leaks, and keeping your lawn in good shape can go a long way in preventing depreciation.
Again, an increased market value of your home raises home equity.
Benefits of Building Your Home Equity Faster
Building home equity faster offers homeowners a range of benefits:
- Wealth Building. As your equity grows, you effectively build wealth and improve your financial situation.
- Access to Cash. Accelerating the growth of your home equity gives you access to more funds when needed. You can use your home’s equity for a home equity loan or home equity line of credit.
- Increased Financial Security. Owning a significant portion of your home fast provides security and financial stability.
Building home equity fast is a prudent financial strategy that requires discipline and clear strategies. Apply the strategies listed above to help accumulate equity on your home faster to gain full ownership of your home sooner!
Leverage your home equity! Avail of a home equity loan or a home equity line of credit from Greater Alliance Federal Credit Union to get extra money to finance large expenses.