As you make your monthly mortgage loan payments, you naturally gain equity in your home. If you pay on time, your equity will grow on its own as your principal loan balance decreases, but you can also help speed up the process.
Plan To Pay More Toward Your Principal
You’ll pay off your loan over the pre-determined, fixed period of time which is usually 15 to 30 years. As you make payments, your principal balance decreases, which is what we’ve already learned is how you build equity. You can increase how quickly you’re gaining home equity by making extra mortgage payments or paying more than you owe each month.
If you make one extra payment a year, you could potentially pay off your loan ahead of schedule. You could also pay $X more than your required payment each month to get ahead. However, some loans have prepayment penalties and you could be penalized if you pay off too much of your loan ahead of schedule.
Use Bonus Money, Gift Funds, Etc. When You Can
This goes hand-in-hand with paying ahead of schedule. If you don’t want to commit to $X more a month or one extra payment a year, just pay extra when you have the funds available. This might be when you get a holiday bonus at work or when you get your tax returns. However, when you make an extra payment, make sure that money is going toward your principal, not your interest.
Complete Home Improvement Projects
From a minor bathroom remodel to a major kitchen renovation, a home improvement project can add significant value to your home and therefore, increase the equity you have in your home. Even an investment of a few hundred dollars could bring a huge return in the home’s value.
Choose a 15-Year Loan
A common mortgage choice is a 30-year mortgage loan, which means you back the loan over a 30-year period, but there is also a 15-year loan term option. You can compare the monthly mortgage payments and costs associated with a 30-year versus a 15-year mortgage with your mortgage lender to see if a 15-year mortgage is within your budget.
Make a Big Down Payment
You may qualify for a loan with no or a low down payment, and while that may be tempting, if you are looking to build equity faster, it may not be the best choice. To build equity quickly, consider making a large down payment on your home. The more down, the more equity you start with. If you put 20% down, you start with 20% of the home’s value of equity in your home. An added bonus to putting at least 20% down is that with certain loans, this will mean you can avoid paying PMI (Private Mortgage Insurance).
Building equity is a huge benefit of homeownership. Over time by making your mortgage payment in full or paying more than you owe, you are building a valuable asset that may help you in the future.