How to Build Equity in Your Home Faster
Building equity in your home is one of the best ways to increase your financial wealth over time. Equity—the difference between the market value of your home and the amount you owe on your mortgage—grows naturally as you make mortgage payments. However, there are strategies to accelerate this process, allowing you to build equity faster. Here are some practical tips for homeowners looking to pay down their mortgage quicker and boost their home equity.
1. Make Extra Payments Toward Your Principal
One of the most effective ways to build equity faster is by making extra payments toward your mortgage principal. This reduces the total amount of debt you owe, and as a result, you’ll build equity more quickly. There are a few ways to do this:
Monthly extra payments: Add a fixed amount to your monthly mortgage payment. Even a small increase can make a significant difference over time. For example, adding an extra $100 each month could shave years off your mortgage term.
Bi-weekly payments: Instead of making monthly payments, consider paying half of your mortgage every two weeks. This results in 26 half-payments or 13 full payments per year instead of 12, helping you pay down your loan faster.
One-time lump-sum payments: If you receive a bonus, tax refund, or other windfall, consider applying part or all of it toward your mortgage principal.
2. Refinance to a Shorter Loan Term
Refinancing can be a powerful strategy to reduce the length of your mortgage and pay it off faster. For example, if you currently have a 30-year mortgage, refinancing to a 15-year mortgage could significantly reduce your interest costs and allow you to build equity more quickly. The benefit of refinancing to a shorter term includes:
Lower interest rates: Typically, shorter-term loans come with lower interest rates, which means you'll pay less in interest over the life of the loan.
Faster equity building: With a 15-year mortgage, more of each payment goes toward the principal, helping you pay off your loan quicker.
However, refinancing to a shorter loan term can increase your monthly payments, so it’s important to ensure that your budget can handle the higher payment before making the switch.
3. Make Lump-Sum Payments When Possible
If you come into some extra cash—whether from a work bonus, tax refund, or selling unwanted assets—putting it directly toward your mortgage can significantly accelerate your equity-building process. Even a single lump-sum payment can reduce the overall principal balance and decrease the amount of interest you’ll pay over the life of the loan.
When making lump-sum payments, try to apply the payment directly to your principal rather than the interest. Some lenders automatically apply these payments to the interest first, so it’s worth clarifying how your lender handles such payments.
4. Round Up Your Mortgage Payments
An easy trick to help you pay off your mortgage faster is to round up your payments. For instance, if your mortgage payment is $1,350, try rounding it up to $1,400 or $1,500. This small change won’t impact your budget much, but over time it can add up and reduce your mortgage balance quicker. The additional funds will go directly toward paying down your principal, helping you build equity faster.
5. Pay Down Other Debts First
If you have high-interest debts (such as credit card balances or personal loans), consider paying them off before aggressively tackling your mortgage. While it might not seem like it’s directly related to building equity, eliminating high-interest debt frees up more of your income for mortgage payments. Once those debts are cleared, you can use the money that would have gone toward them to make larger payments on your mortgage.
6. Invest in Home Improvements That Increase Value
Another way to build equity is by making smart home improvements. Not all upgrades will yield the same return, so focus on renovations that add significant value to your home. Some of the best improvements include:
Kitchen and bathroom remodels: These are often the most impactful renovations when it comes to increasing home value.
Curb appeal: Improving your home’s exterior with landscaping, fresh paint, or a new roof can increase your home’s market value.
Energy-efficient upgrades: Installing energy-efficient windows, solar panels, or high-efficiency appliances can increase the attractiveness of your home to future buyers.
Keep in mind that not every home improvement will result in an immediate increase in equity, but strategic upgrades can significantly increase your home’s resale value over time.
7. Consider an Accelerated Payment Schedule
If you’re able to make payments more frequently, such as bi-weekly instead of monthly, you could pay down your mortgage balance more quickly. By splitting your mortgage payment in half and paying every two weeks, you’ll make 26 half-payments, or 13 full payments, each year instead of 12. This extra payment each year can help you pay down your principal more quickly, leading to faster equity accumulation.
8. Stay on Top of Your Property Value
Another indirect way to build equity is by keeping an eye on your home’s market value. If the value of your home increases, your equity will naturally grow. To help this process along:
Maintain your home: Regular maintenance can prevent depreciation and keep your home in good condition, ensuring it retains its value.
Monitor the housing market: If property values are rising in your area, your home’s value could increase without you having to do anything. Keep an eye on your local real estate market to stay informed.
Conclusion
Building equity in your home faster is possible with a few strategic steps. Whether you choose to make extra payments, refinance, or invest in home improvements, each of these methods can help you pay off your mortgage more quickly and increase your financial security. Remember, the more aggressively you pay down your mortgage, the sooner you'll own your home outright, putting you in a better position to take advantage of future financial opportunities.