Sometimes referred to as “forced savings”, equity in your home is important to build if you are working to build wealth via real estate. Equity in your home amounts to investment money for more real estate, larger real estate, or simply a great addition to your savings accounts and investment portfolio. Below are five ways to increase your home equity.
1. Allow your home to appreciate based on the growth of the market.
This is a particularly passive way to build equity – allowing your home to grow equity based on the growth of the local housing market.
One of the more passive ways to allow your home to build equity is to allow it to appreciate in value. According to the most recent report by the Federal Housing Finance Agency, the national value of homes have increased by 8.7% since April of 2017. This means that the raised value of your home boosts your home’s equity.
2. Make home improvements that will provide a positive return on the home.
To speed up the growth of equity, make structural improvements on the home. This includes the following improvements and updates:
- Landscaping and outdoor entertainment space
- Added square footage (added bathrooms, bedrooms, closets, garage space, etc)
- More efficient work spaces (primarily kitchen, bathrooms, garage)
- Large gather and entertaining areas
Depending on the state of the home, fresh paint, new flooring, and updated appliances can also increase the value of your home (or at least the amount of offers you have to choose from once you’ve listed). But before putting together a whole remodel plan, you may consider speaking with your realtor and your accountant to pick out the home improvements that will give you the most positive return on your home.
3. Make a larger initial investment than necessary upon purchase.
A 20% down payment is required in most cases to avoid paying insurance on your home loan each month. However, home loans are also available for as little as 3% down in some scenarios. But if you’re considering what it takes to build equity and see a greater return on your real estate investment, a larger down payment is always best. This will decrease your monthly mortgage payment, allowing you to put more towards the principle amount for a shorter life of the loan – and with a shorter term loan, you pay a whole lot less in interest.
4. Opt for a short-term loan when possible.
Most mortgages are based on a 30-year adjustable home loan. The benefit to a longer-term loan is a smaller monthly mortgage payment – but that’s about it. When possible, aim for a 15-year fixed rate mortgage to pay less interest and more principle every month.
Refinancing your loan is also an option if you plan on paying off the full amount of the loan before selling OR if you can obtain a significantly lower interest rate. If your mortgage interest rates can be dropped by at least 1.5%, this equity building route is worth considering.
5. Pay more than 12 mortgage payments per year.
The amount of “extra” mortgage payments you make each year for a quicker route to paying off your loan is going to vary for everyone. The general rule of thumb is that paying a 13th mortgage payment each year is a great way to avoid interest and shorten the life of your loan.
Paying more than the minimum mortgage amount each month is also a possibility. But you must earmark the additional payment to go specifically towards the principle of your loan or else it will be applied to the interest and you won’t make the necessary headway for increasing your equity.
If you’re purchasing rental or other investment property, aim for a price range which you can make double the mortgage payment every month.
There may be instances where you receive extra money outside of your regular income, such as inheritance, work bonuses, Christmas money, and other occasions. If there are no pressing needs, you can put this extra money toward your home mortgage, giving your home equity a boost.
Consider Which Options Are Best For Your Personal Financial Investments
There is no general rule of thumb for speeding up the growth in equity for your real estate. Each scenario will be unique, with many variables to consider. Speak with Brad Jensen about your Park City real estate about increasing your home equity whether you’re ready to make a new purchase or planning on selling in the future.
Brad Jensen has lived and worked in Park City for decades. He has seen trends come and go, markets rise and fall, and homeowners succeed in selling their real estate for top dollar. For more specific real estate advice on Park City, UT, properties, contact Jensen and Company.