6 Ways to Build Equity in Your Home
Updated August 1, 2020 . AmFam Team
You may have heard the term home equity before. Perhaps you’ve wondered what exactly home equity is, what it means and why it matters. Maybe you’ve asked yourself, how does home equity benefit me or how do I build it?
We’re here to help remove some of the mystery surrounding home equity and go a step further — by providing you with some reliable methods of growing it. We’ll explain what home equity is, why it matters and what you can do to increase the value of your home over time.
What Is Home Equity?
Simply speaking, home equity is the difference between your home’s fair market value and what you owe on the outstanding balance of all liens. Also known as a real property value, your home’s equity appreciates when you make payments against the mortgage balance, or when your property value increases.
For example, let’s say your home is valued at $100,000 and you owe $40,000 — your home’s equity would be the $60,000 in between. As a general rule, the greater the positive number in home equity, the better. You gain equity primarily from paying down the principal balance of the home loan through your monthly mortgage payments, or by an increase in your home’s market value.
Check out our guide for calculating home equity easily.
6 Methods for Building Home Equity
Building home equity is crucial to homeownership because it helps to provide future financial security. And you may be able to use it as collateral, borrowing against it when a major expense arises. Through home equity loans or lines of credit, you may be able to convert your home equity into cash when you really need it.
So, how to grow your home’s equity?
1. Increase your down payment
The most reliable way to build equity also happens to be one of the quickest ways. By increasing your down payment when you purchase your home, you’re putting more equity directly into your home.
Let’s say the home you buy is valued at $100,000. Next up, suppose you make a $5,000 down payment on that home. At this point, you’ll owe $95,000 on your mortgage and you’ll have $5,000 in equity. If, however, you increased your down payment to $20,000, you would owe $80,000 on the mortgage and give yourself an instant $20,000 in equity.
As an added bonus, making at least a 20% down payment on your conventional loan will eliminate the private mortgage insurance (PMI) premium. PMI is an insurance policy that protects lenders or investors in the event a borrower defaults on their mortgage. The cost is usually paid by the homeowner on a monthly, upfront or mixed basis. By putting down at least 20% of the home’s value, however, you waive the PMI cost. That’s extra money every month to pay toward your mortgage principal!
2. Make bigger and/or additional mortgage payments
Generally speaking, only a portion of your mortgage each month will be designated to the principal cost of the house. By making additional payments, or paying above your minimum payment, you’re building equity in the home by paying down the principal. Chipping away at the principal — the amount you owe toward your home before taxes, interest and other fees — can help steadily build your equity.
Even an extra $50 a month can help grow the equity of your home considerably over time.
3. Refinance and shorten your mortgage loan term
Another option for building equity is refinancing your home and using shorter loan terms. This has a couple of added benefits as you’ll typically secure lower interest rates and shorter loan terms allow for more of your mortgage to go to the principal every month. Remember, money paid into the principal of your mortgage is cash converted into equity!
Before you refinance your mortgage, however, ask yourself a few of these questions to be sure you’re making the right move.
4. Discover unique sources of income
The most important strategy for building equity is reducing what you owe while your property value increases. If you pay the minimum amount each month, you’re likely not building the equity you could be. This is why finding opportunities to pay off your mortgage could be attractive to many equity-savvy homeowners.
Windfalls, gifts, inherited money are all great, but they’re usually pretty hard to come by. Consider other sources of income — including revisiting your budget —to build up equity by paying off the principal you owe more quickly.
5. Invest in remodeling and home improvement projects
Besides paying down the cost of your loan, one other primary source of equity growth occurs when you increase the property value of your home. By upgrading your home through projects like a kitchen remodel, you could be adding equity to your property down the line. Whether you’re hiring a professional or approaching your remodel with DIY in mind, you can boost your home’s market value and see a significant increase to your home’s equity. A home worth more than you owe is the goal and a great way to get you there is by investing in property improvements.
6. Wait for the value of your home to increase
Unless you have a plan to spend your home’s equity — say on a project or expense coming up soon — you may be able to rest on natural property value growth. As you pay off your mortgage each month, and if your home’s value rises naturally, equity will be a side benefit. It’s important to do your homework before buying a home, however. Making sure the neighborhood, the property values and the condition of the home in question are solid and projected to increase.
Beware of the disadvantages of letting your property naturally grow, too. For example, events like a housing market crash could cause property value to depreciate and eat some of that property equity you’ve been building over time.
Protect the Value of Your Home
A home is one of the most important tools for financial security in your future and your home insurance is no different. Protect the things you work hardest for by taking a moment to contact your American Family Insurance agent to discuss your home equity plans. You’ll be taking the necessary steps to secure yourself, your family, your home and your financial future.
Related Articles
- 9 Steps to Create a Home Inventory for Insurance Claims
Your home is more than a roof over your head. It’s where your dreams grow, your family thrives and memories are made. But the possessions you keep inside are important, too.
Whether you’re renting an apartment or own your home, you’ve most likely got an insurance policy designed to protect your dwelling and the things inside. Should the unthinkable happen and you have to use that insurance policy, it’s important to have a plan in place. And a home inventory list is a great way to get started!
We’ll walk you through how to create a home inventory so — in the event of the unexpected — you’ll be more prepared and have a streamlined recovery.
What Is a Home Inventory?
Quite simply, a home inventory is a complete list of all the items, especially valuables, in and around your home. The best home inventories include photos, descriptions and dollar values of each of your belongings. The more detail, the better! It’ll help you provide a comprehensive list to your agent of items lost in the event your home is damaged or destroyed, allowing you to get the most out of your coverage.
When your describing the items in your list, remember that the more information, the better. Here’s a quick reference list of the type of information you should include in your home inventory list:
- An in-depth description of the items. For example, rather than writing down “diamond ring,” be more descriptive, such as: “an emerald cut diamond ring, with white gold shank, accent stones and initials inscribed below the bridge.”
- Make, model, and/or serial number of the items.
- Date of purchase, receipts and photos.
- Estimated replacement cost if you bought it today. Do note that the value of the items might be different today than it was when you first bought them. This is especially true with jewelry, and other valuables.
- Appraisals at time of purchase. Especially if your items were appraised for insurance purposes.
Why Do I Need a Home Inventory?
Whether you’re a homeowner or a renter, everyone can benefit from a home inventory!
If you ever have to make a claim, a home inventory is a great asset to have, especially after stressful events like theft, storm damage or a fire (take a look at how one renter used their home inventory after facing an apartment fire).
When you make a claim, you typically submit information on everything that was lost — which can be difficult to do off the top of your head for all your possessions. Remembering to replace your TV or computer are no-brainers, but when it comes to remembering each piece of jewelry in your jewelry box, things tend to get overlooked. Having a personal property inventory will help, along with knowing how to properly insure your jewelry.
When you have your home inventory checklist, you know exactly what needs to be replaced, and you’ll have peace of mind knowing your entire household is protected.
- Reasons Why a Roof Leaks
You’re admiring the rain from the comfort of your home when you notice a sound — the unmistakable drip of water dropping onto your floor. The first and hardest step is figuring out why your roof is leaking. And with these tips, you’ll find the culprit in no time!
Here’s Why Your Roof Is Leaking
The list of reasons why your roof is leaking may seem long, but don’t worry — when it comes to finding the leak and fixing it, the finding is the hardest part. And the good thing about these problems? They can all be fixed. Check out the list and see what’s troubling your roof:
Your roof is old
Roofs don’t last forever. Protecting your home and everything inside it from the elements comes with a cost. And with all that rain, snow, ice, wind and even sunlight wearing down your roof, it becomes more susceptible to leaks. Every roof will eventually need to be replaced, so learn more about how long your roof should last based on what it’s made of.
- How to Check Your Roof for Storm Damage
There’s no good time to find out your roof needs repair — but you may be able to mitigate that pain by routinely checking your roof for damage after severe weather. Waiting for a leak or damage to present itself gives the problem time to grow and worsen.
And sometimes, you’ll be faced with expensive roof and interior damage repairs if you’re not diligent. By being proactive and checking your roof for damage after severe weather hits can help your roof — and your savings — stay healthy.
