More people than ever are buying homes which is great news! It means more people have a chance at building wealth through homeownership. But if you really want to build wealth, you have to build equity.
Home equity is the percentage of your home's market value that you own...and it's key to building wealth through homeownership. Of course, one obvious way to do this is to increase your down payment. Your down payment usually equals instant equity. However, a larger down payment isn't always an option. Plus, as you'll see below, sometimes waiting to accrue more money for a larger down payment means you'll be losing out on appreciation.
Here are 5 more ways to build equity in your home:
1. Let your home appreciate
Building equity through appreciation can take little time or a lot, depending on the market. With home prices going up like they have in recent years, many home owners have seen their equity increase rapidly.
"Zillow research indicates that the median home value grew from $185,000 in April 2016 to $216,000 in April 2018. If you bought a home for $185,000 in April 2016 with a down payment of $12,950, your beginning 7-percent equity would have grown to 23 percent by April 2018.
We calculate this by subtracting your current loan balance ($165,600) from your home’s current value ($216,000). Then we divide the difference by your home’s current value. One-eighth of this additional 16 percent equity is from paying down your mortgage, and the rest is market appreciation.
If you waited two years and bought the same home in April 2018 with a 20-percent down payment of $43,200, you started off with 20-percent equity. You also used 3.3 times more cash to make the purchase. And here's the kicker: Your total monthly housing cost would be the same — about $1,050 in both cases."
3. Use financial bonuses
Use work bonuses, family gifts, inheritances, or other unexpected windfalls to pay down your mortgage. And if you do make a significant lump sum payment, check with your lender to see if they will recalculate your payment based on the new, lower balance.
4. Make biweekly payments
As long as your lender doesn't charge you extra for processing semi-monthly payments, make mortgage payments every two weeks instead of once a month. Over the course of a year, this will add up to 13 monthly payments instead of 12. You'll build equity faster and shave five to six years off a 30-year mortgage.
5. Get a 15-Year Mortgage
Take out a 15-year mortgage instead of a 30-year mortgage, and you'll build equity twice as fast. Keep in mind you'll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying.
6. Make home improvements
While new appliances or cosmetic features like paint are unlikely to increase the value that much, big improvements like new kitchens, additional bathrooms or other rooms will add meaningful value. Make sure the cost of such improvements will create the added value you're looking for.
