Your home is the place you return to each day to find solace and comfort—but it’s also the largest investment that most Americans will ever make.
When we consider the value of a home, we often think of how it functions to provide a roof over our heads and the profit it can bring when sold. But home equity—the market value of your home, minus your mortgage balance—can help homeowners unlock cash for needed expenses.
Below we’ll look at how to build equity in a home and how it can act as a financial tool for homeowners.
Equity is the portion of your home that you actually own by paying off each mortgage payment. If you purchased your home with a cash sale, then congratulations—you have 100% equity in your home.
For most homeowners, the road to homeownership starts with a mortgage lender, and equity slowly changes hands over time from the lender to the homeowner as the loan amount is paid off.
Equity building can:
While building equity is largely a matter of time, you can make choices that speed up the process, from decisions regarding your initial loan amount to how well you take care of your property.
We’ll start with the most simple path—make each monthly mortgage payment consistently and on time. Your mortgage statement should reflect the progress that you make each month with figures showing what you owe on the principal and the interest of your loan.
As you contribute more to the principal you owe, that translates to a slow change in equity ownership from the lender to you.
Real estate investing covers much more than individual homeownership, and that’s because property grows in value over time. While there are dips along the way, for the vast majority of real estate, it’s safe to count on its value increasing.
The past few years, for example, have seen tremendous jumps in property values in much of the United States, with home prices rising by 17.8% in 2021.1 As construction slowed during the pandemic and people became more accustomed to working and entertaining at home, house prices jumped because demand was greater than supply. Currently, we’re back to a more conservative prediction of 5% growth in 2023.
Most home buyers opt for a 30-year mortgage loan. However, choosing a 15-year loan initially or refinancing to a shorter-term loan once you can afford it, can shorten the time it takes to repay your mortgage and build equity. Opt for a shorter-term loan if you are wanting to access your equity sooner. Then learn more about how to get equity out of your home without refinancing, such as home equity loans.
Besides building equity faster, a shorter loan term can also help you accrue significant savings on interest: With a 15-year term, you can pay less than half the total interest you’d pay with the same loan under a 30-year term.2
A mortgage lender makes a profit by charging interest, and the structure of mortgage loans means that your early payments go mostly toward interest with just a bit toward principal. That makes equity building more difficult early in the loan's life.
Most lenders will allow you to make an extra payment applied specifically to your principal, but look out for prepayment penalties or principal-only payment fees.
Just like opting for a shorter loan term, paying down your principal will help your equity grow faster and reduce each interest payment you pay over the life of your loan.
Another way to actively manage your loan is to opt for biweekly payments rather than the standard monthly mortgage payment. Biweekly payments allow borrowers to make 13 total payments rather than 12 per year and pay down interest more quickly.
This allows homeowners to start paying down principal and build home equity.
General upkeep and home improvement are important to your family’s health and comfort, but can also help protect the value of your property. A small repair can grow into a much larger problem when left unattended, such as a leak that leads to water damage and mold growth.
You can utilize annual maintenance checklists online and the report from your appraiser. Appraisal reports often provide a bespoke list of repair and maintenance suggestions, including upcoming replacement needs.
If you buy a fixer-upper, then renovations might begin before you move in. However, most likely, you’ll choose to renovate as your family needs change. For other homeowners, renovations come as part of the preparation for a sale (which unfortunately means they don’t get to enjoy the rewards themselves).
Regardless of timing, wise renovations are done with an eye toward how they affect home value. Check out online resources, talk to your realtor, and do the math to understand the effect any renovation choices will have on your immediate property value and home equity as well as eventual resale value.
If you plan to add a garden tub to a bathroom by taking over the closet space of an adjoining bedroom that you use for an office anyway—it’ll cost you more than the contractor’s estimate.
Homeownership provides you with the freedom to customize your space to your needs and preferences, but be sure you understand a renovation’s impact on property value and home equity before you reduce the number of bedrooms or make other permanent changes to the structure.
The website Quora is full of questions like “my neighbor redid his driveway and paved over part of my property—what do I do?” and “help—trying to sell house but neighbor built fence three feet into my backyard”. Most answers (other than suggestions for petty revenge and “happened to me too!”) involve time and money needed to legally take back and remove alterations to your property.
If you’re one of the many people with great neighbors who invite you to cookouts and discuss any plans along property lines with you first, then enjoy the barbecue. For everyone else—be sure you know your property lines and pay attention to any potential disputes or infringements that can cost you money or reduce your property value.
PMI protects the lender’s investment but comes out of your pocket, and you can expect to pay about $30 to $70 per month for every $100,000 borrowed.
Most lenders require PMI until you own 20% of home equity. You can ditch PMI by:
With home improvement, you may be able to prove that your property value has increased with a new appraisal. If the updated value alters the calculation so that what you still owe on your home principal is now less than 80% of its appraised value, contact your lender to recognize the new value and cancel PMI payments.
Starting out with a new home purchase? One of the best ways to get a head start in growing home equity is to make a big down payment on your home. Besides immediately investing in a larger portion of equity, a down payment of 20% or more means you can skip the PMI required by conventional loans with lower down payments.
Another way to plan for more active growth of home equity is by doing your homework before selecting a new home. Work with a real estate agent and do some research to identify:
After building equity, you might be wanting to access it. This is where home equity loans come into play. If you are wondering, what is a home equity loan, read our guide to learn more. It is also important to understand the difference between a cash out refinance vs. home equity loan to see which method is best for you.
If you’re considering a sale or refinance to access your home equity, Truehold's residential leaseback may be right for you. Instead of leaving the house you love, you can sell your home and then lease it back for as long as you want to stay there.
For older homeowners, tapping into home equity can help with medical costs, eliminate debt left to heirs, and reduce your monthly housing budget. Truehold takes over maintenance on your property so you’re free of the stress and responsibility of repairs while staying in your family home.
Call us today at (314) 353-9757 and one of our advisors will reach out to see if your home qualifies for Truehold’s sale leaseback program.
Sources:
1. Statistica. Freddie Mac House Price Index price appreciation from 2010 to 2023. https://www.statista.com/statistics/275159/freddie-mac-house-price-index-from-2009/
2. Investopedia. 15-Year vs. 30-Year Mortgage: What's the Difference? https://www.investopedia.com/articles/personal-finance/042015/comparison-30year-vs-15year-mortgage.asp
3. Freddie Mac. Breaking down PMI. https://myhome.freddiemac.com/buying/breaking-down-pmi
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