Building equity is probably the biggest benefits of purchasing a home. Equity, in terms of property ownership, is defined as how much of your home you actually own. There are two main ways to build home equity. The first is by lowering the total amount of debt owed on your home and the second is increasing your property’s value.
How to decrease debt
Decreasing the amount owed on your property is step one in building equity. You can do this by making monthly payments, implementing shorter terms or by making extra payments.
This is the most standard practice of decreasing debt. Generally, most mortgages fall under a 30 year term. You make the monthly payments to your lender (generally with a fairly high interest rate) decreasing the total amount of debt you owe on your home. This is the most passive and common way of paying down equity.
Like mentioned above, most mortgages are for 30 year. If you want to pay down your debt faster, you can get a 15 year loan. The interest rates on these loans are generally much lower than those for 30 years. The one downfall is that you’ll be paying a much higher monthly rate to your lender.
Make Extra Payments
If you’d like to meet somewhere in the middle of paying down debt, you can always make extra payments. It’s treating a 30 year mortgage like a 15 year one without the risk of not being able to make a full payment.
How this works is you start with a traditional mortgage. Then every month, using whatever leftover cash you have, give extra money to you lender (just make sure they apply it to your premium). You can add as little or as much to that monthly payment so you never feel strapped.
How to increase value
Let Your Home Appreciate
We will start with the most passive thing first. All this means is let your home live. The longer you hold onto your home and let property values increase on their own terms the more money you “make” on your home. In some areas, homes take a long time to appreciate but in other areas like popular cities and their close suburban areas, generally home values will increase much faster.
Add Meaningful Value
The final way to build equity in your home is to add meaningful value. Now before you go around painting and updating appliances hold on! Your taste might be different that that of potential sellers. There are a few things that mostly everyone can agree on and those are nice kitchens and more bathrooms.
Updating your kitchen to be more functional and adding on additional bathrooms will likely increase the value of your home. Other way could be updating curb appeal and making your home solar compatible.
Being a homeowner is a proud accomplishment and learning how to build equity is one of the many important responsibilities of owning a home.