Looking for ways to build home equity? Who isn’t? Equity, in case you don’t know, is the difference between your home’s market value and how much money you still owe your mortgage lender. The more home equity you have, the better your overall financial situation. This is particularly true if you’re looking to sell your home and make a new home purchase.
Consider, for example, a $200,000 mortgage that increases in market value by $25,000 over five years. Let’s say that over that same time, you pay $30,000 on the home’s principal balance. If you then sell your home at market value, you have $55,000 in home equity. This is the total of what you’ve paid in principal balance and how much your home’s value has increased since you bought it. You could then use this money toward the purchase of your new home. Make sense? We hope so! Up next, we’ll explore three practical methods for boosting home equity.
1. Make a sizable down paymentDepending on the kind of home loan you land on, it’s possible you could buy a home with a down payment as little as zero. We don’t recommend this, however. With a decently-sized down payment, you’ll build instant home equity. This is because your principal mortgage balance will decrease from the very start – even before you start making monthly payments.
2. Pay extra on your mortgage each month
If you’re a homeowner who feels stretched just making regular mortgage payments, trying to make bigger-than-necessary mortgage payments might be overly ambitious. But if there’s any way you can possibly pony up a few extra bucks for your mortgage each month, you absolutely should. Even the smallest amount of extra money toward your principal balance helps build home equity. As tempting as it might be to go buy a car or boat if you get a raise or substantial monetary gift, it’s wiser to put this toward your monthly mortgage payments. Before you know it, you will build a ton of home equity.