A CoreLogic analysis shows U.S. homeowners with mortgages (roughly 63% of all properties, according to the 2020 American Community Survey) have seen their equity increase by over $3.6 trillion since the second quarter of 2021, a gain of 27.8% year over year. That’s a lot of equity to tap into.
Your home is typically the most valuable asset, and for most, equity in a home is a crucial way to build personal wealth over time. Whether you own your home or have an investment property, real estate is typically a good investment because property values historically increase over time. When you buy a house, you are building equity in a home that you can borrow from if needed.
READ MORE: What is a second mortgage?
How to Increase Your Home Equity in 13 Steps
Homeownership is a significant investment. A home purchase is likely one of your most important financial decisions. Increasing your home’s equity can boost your borrowing power, but also will save you money in interest over the life of your loan.
Here are some ways to build extra home equity.
1. Make a Significant Down Payment
You’ll have to pay a minimum down payment when purchasing a home. The downpayment can be as low as 3% of the purchase price but as high as 20%. It’s hard to come up with the cash to make a big down payment, but it’s worth the effort.
The amount you put down becomes instant equity in the home because you’re paying it out of pocket rather than borrowing.
2. Pay for Home Improvements
Updating your home and adding specific amenities can increase the value of your home. Bathroom and kitchen renovations and remodels almost always add value. Energy efficiency updates will add value, decrease utility bills, and provide a tax credit. For significant expenses like solar panel installation, you could use a home equity loan or home equity line of credit (HELOC) to fund the improvement, then use your utility bill savings to make those monthly payments. Plus, the government is currently offering tax rebates to homeowners to help offset the cost.
Not all home improvements have to be big ones. New paint and landscaping can boost curb appeal and add to your home’s value.
3. Refinance to a Shorter Loan Term
Paying off your mortgage gives you 100% equity if you don’t have other liens on your house. Refinancing a 30-year mortgage to a 15-year mortgage will help you pay your loan off faster and save thousands of dollars in interest. A 15-year mortgage will increase your monthly payments, so make sure you can afford the new charges. If your interest rate is significantly higher, it may not make sense to refinance to a shorter term. If that’s the case, you’ll be better off making extra payments.
READ MORE: Is a home equity loan a good idea?
4. Refinance to a Lower Interest Rate
Current mortgage interest rates are at historic highs. But when they fall, be prepared to refinance to a lower interest rate — particularly if you’ve purchased your home recently. In the meantime, work to boost your credit score and keep all of your records so that you can move quickly if rates fall suddenly.
Due to current market conditions, this likely will not be a great choice for you right now unless you had a less-than-ideal credit score when you initially purchased your home.
You do not have to extend your mortgage term (if you’ve been paying for two years, you can set up your refinance to be repaid in 28 years.) You will have to spend several thousand dollars in closing costs. Still, if you’re planning to remain in your home for several years, the savings from the lower interest rate will lower your monthly payment and save you thousands of dollars in interest over the life of your loan.
5. Pay Your Mortgage Down Faster
You can make extra mortgage payments or pay a bit differently each month — beware of any prepayment penalties attached to a mortgage. These are fees that the lender will charge you if you pay off your mortgage earlier than its term.
The more you pay down, the more equity you have. Paying down even a tiny amount each month can save you significant interest on your loan because the more you pay down, the less balance there is for the lender to charge interest.
6. Make Bi-weekly Payments
Switching to bi-weekly mortgage payments will add one extra mortgage payment each year.
Instead of scheduling your mortgage payment once a month, pay half of the monthly payment every other week. Making these extra payments results in 26 annual payments because there are 52 weeks a year. You’ll end up making 13 total mortgage payments. Paying with this frequency can help you pay your mortgage off 6 to 8 years earlier. You can set the payments to correspond with each payday if you get paid bi-weekly.
7. Ditch the Private Mortgage Insurance
Private mortgage insurance (PMI) is what the lender charges you to protect its investment if you don’t repay your loan. PMI usually costs about 0.1% – 2% of your loan balance yearly. It is added to your monthly mortgage payment. If you can get rid of PMI, you can apply that extra money to the loan’s principal balance. To avoid PMI, you must put 20% down when you purchase the home.
You may have more equity than you think if your home value has shot up during the hot real estate market. If so, you can request to have the PMI removed.
Once you have 20% equity in your home, contact your lender and request your PMI be removed. Once you have 22% home equity, your PMI will come off automatically.
Mortgage insurance for FHA loans works a bit differently. It is known as a mortgage insurance premium (MIP). If you make a down payment of at least 10%, you’ll pay MIP for 11 years. If your down payment is less than 10%, you’ll pay MIP for the entire life of the loan, so the only way to remove it in that instance would be to refinance your loan to a conventional mortgage.
READ MORE: What is a reverse mortgage?
8. Throw Any Extra Money at your Mortgage
“Extra” money may seem laughable these days, but even small amounts can add up over time.
Whenever you have extra cash (provided you already have a nest egg set aside for financial emergencies), put any windfall toward your mortgage. Use bonuses, inheritances, income tax refunds, and any other extra money in your budget. Put toward your principal balance to help pay it down faster.
Note that you should only do this if your other debts are paid. It doesn’t make sense to pay extra on a mortgage loan with a 3% APR if you’re currently carrying credit card debt with a 30% APR.
9. Keep Up with Essential Maintenance
If your home falls into disrepair, its value may not increase or could drop. Some basic landscaping, fresh paint, lawn care, and ensuring everything in your home is in working order can help boost value.
Set aside money in a savings account for essential home repairs and updates.
READ MORE: 10 ways to use your home’s equity
10. Follow Property Values and Learn Your Current Home’s Market Value
Property values can increase dramatically in a hot market, but your equity may not reflect your home’s new appraised value. Even if you’re not planning to sell, higher property values work in your favor — aside from higher property tax bills.
Conventional loan borrowers can take advantage of higher property values by canceling their PMI when their loan-to-value ratio hits 80%. There are longer-term benefits, including higher resale values, if you eventually decide to upgrade to a new home.
A real estate agent can help you learn your home’s appraised value vs. the estimated resale value. Keep an eye on similar properties, the asking prices, and the sale price.
READ MORE: Can a paid-off home be refinanced?
11. Spy on the Neighbors
Not literally, but keep an eye on what’s happening in the neighborhood.
Is everyone suddenly replacing HVAC units or backyard fences? Seeing what neighbors are doing may signal that you’ll need to update yours soon.
If your home is surrounded by nicer houses with recent updates and upgrades, it will be tougher for you to sell for top dollar. Many buyers would rather spend their time and money on aesthetic updates (like paint or flooring), so getting the practical stuff out of the way makes your home more enticing.
12. Be Patient
Homebuyers can get impatient, but don’t worry: your home will appreciate over time. In a hot housing market, your home’s value will increase, and you don’t have to do any work beyond essential home maintenance. Various factors determine your home’s value, including supply and demand, the market value of other area homes, commercial development, and current economic trends.
Remember that the market fluctuates.
Just be aware that though many fluctuations work in your favor, some will not, and you could occasionally lose equity if home sales are weak or your neighborhood reputation declines.
READ MORE: Can you refinance a home equity loan?
13. Share Your Space and Put the Money Toward Your Mortgage
There are a few ways to share your home’s extra space to earn extra income. It may cost you some privacy, but it doesn’t have to be permanent.
Get a Roommate
Getting a roommate helps you live cheaper, save on the mortgage payment, and split other bills. The more roommates you can save more based on what economists call the “economies of shared living.”
Add a Rental Suite
You can convert a garage or basement or purchase a house that already includes a separate apartment. Unlike a roommate, this gives you space and privacy, and you can charge more money.
You can list your rental suite, room, or a second vacation property home. Even finishing a basement with its separate entrance, kitchen and bath can make you big bucks, particularly if you live in a high-demand area.
Offer Personal Storage
People are always looking for alternatives to expensive storage units. Target those who are in transition and need a place to store some boxes in the interim. For people with extra space in their garage, shed, or RV parking space, you can keep other people’s stuff, even if it is just for a short-term rental.
Become a Petsitter
Rover.com is an excellent way for pet lovers to share their space but not give up their privacy. If you have a spacious place, you can board several dogs simultaneously, and pets love being in a home rather than a boarding kennel.
What exactly does home equity mean? To learn more, check out this video:
The Bottom Line
Equity provides many opportunities to homeowners and is an excellent source of savings and future financing opportunities. Equity can later provide you with many investment opportunities, like a second property for rental income or if you need a larger home as your family grows. It’s a time-tested vehicle for building wealth.
A home equity loan is a secured fixed-rate second mortgage that allows you to borrow the amount of equity in your property. The lender provides the proceeds as a lump sum, and you will have a fixed monthly payment. Home equity loans have fixed interest rates and a fixed repayment period. These loans usually have slightly lower interest rates than HELOCs. The interest may even be tax deductible, depending on how you use the loan proceeds.
A home equity line of credit (HELOC) is a revolving line of credit that lets you borrow against your home’s equity and pay it down like a credit card. You will have a fixed “draw period” and a credit limit. A HELOC is ideal for homeowners who need flexibility in their loan amount. The interest rate is usually variable, like a credit card. You will not have to make monthly payments or pay any interest on the loan when you aren’t using it. HELOCs usually have slightly higher interest rates, but you don’t pay interest unless you’re using the loan, so the overall borrowing cost can be lower.
Cash-out refinance is where you take out a new mortgage and get the equity in a lump sum. Cash-out refinancing involves getting a completely new mortgage. You will use the loan proceeds to pay off your current mortgage and get the rest of your home’s equity (up to 80% of your home’s value) in a lump sum. Your credit score will matter, and you’ll have to go through the complex application and approval process used for your original home mortgage. The remaining 20% of your home’s value is a new down payment. If you don’t have enough equity remaining in your home after cashing out your original mortgage, you may have to pay private mortgage insurance or PMI.
Amortization is the period it takes for you to repay a loan. It affects how much interest you pay over the life of the loan and how quickly you’ll build equity in your home. Most mortgage loans will be 30 years or 15 years.
Amortization is an accounting process that gradually reduces a loan over time with installment payments. Those payments are calculated using an amortization formula based on the loan balance, rate, and loan term. Each installment payment is split into principal and interest portions.