How to Build Home Equity
Building home equity means building a monetary value you can access now or later by selling your home or taking out a home equity loan. Your home equity is calculated by subtracting what you owe on your home through a mortgage from the current value of your home if you were to sell it today. Many Americans use home equity as a way to pay for large projects or as a way to build wealth for retirement.
Why Building Home Equity Is Important
Building home equity is often considered important because it is one of most people’s most significant assets. This means that a large chunk of your net worth is often tied up in the value of your house. Studies have shown that over 50% of an average person’s retirement savings is home equity. The 2020 census data shows that the average household aged 65 and older has around $300,000 in home equity.
With these numbers in mind, it’s easy to see how important it is for anyone to build as much home equity as possible. It can make retirement more comfortable and provide a cushion to fall back on if you need to access funds for a child’s wedding or an earlier-than-expected retirement. If you have 50% or more of your liquid assets tied up in your home, you want that equity to be as much as possible.
You can use DECU’s home equity calculator to estimate your equity’s worth today.
Ways to Build Home Equity
There are many different ways that you can build equity in your home. Some are important to consider as you’re buying your house, while others can be considered down the road. Each allows you to grow the value of your equity so that you can access the money as you need it, either now or in retirement. Here are some of the best things you can do to build home equity.
- Make a Bigger Than Normal Down Payment
The more cash you put into buying your house, the more equity you immediately have in the home. Making a large upfront payment to buy your house can be an excellent way to lower your monthly mortgage payments, as you’ll be borrowing less, but it can also be used to save money in your home. This becomes even more important if you want to shelter funds, as homes have more protections in many states than liquid accounts would.
- Increase Your Property Value
Much of the value in your home comes from natural growth in your market over time. However, if you can increase the value of your home through your own doing, you can build equity faster. It should be noted that the amount of money you spend improving your home doesn’t always increase the value when you sell; if it does, that value typically isn’t transferred at a 1:1 rate.
Some things that you can do to increase the value of your home are to add another bedroom or finish a basement. Other improvements might be a value-add for specific buyers, such as putting in a pool, but those improvements don’t add equity as an increase in value for everyone. You’ll want to know how much value you’re adding to your improvements before getting started.
- Refinance to a Shorter-Term Loan
After you’ve owned the home for a period of time, typically at least one year, you can refinance your mortgage. If you end up refinancing your mortgage into a shorter-term loan, it means you’ll be paying more each month, but you’ll also be able to grow the amount of equity you have in your home at a faster rate. This can be a great way to pay the loan off as quickly as possible..
- Make More Payments
Another way to build home equity is to make more payments than required. This gives you more chance to grow your equity because you’ll be overpaying the mortgage. All of the additional that you pay goes against your principal loan, which lowers your total amount owed and increases your equity.
Tips for Building Home Equity
Now that you have some of the best ways to grow your equity, here are a few tips that can help you improve your equity situation with your home.
- Get rid of PMI: Private mortgage insurance is what a lender may require if you don’t put at least 20% down when you buy. This can typically add up to an additional 2% to the total home cost. Once you have at least 20% equity in your home, then you may be able to get rid of PMI, but it won’t be done automatically for you.
- Pay closing costs out of pocket: One thing you can consider doing to increase your equity right away is to pay your closing costs out of your pocket instead of throwing the costs into your mortgage.
- Your market matters: If you’re looking to maximize your home equity, then the market you’re buying in matters. You want to pick a market that has a healthy housing outlook for years into the future. While the unexpected does happen, the value of your home will increase exponentially more in the right market than it would normally.
- Don’t cash out with your refinance: If you decide to refinance your mortgage, you’ll want to ensure you’re not cashing out your equity when you do so. You’ll want to return any money you’ve made in equity into the refinance.
Home equity can be an essential part of your financial outlook. It is one of the largest assets of most Americans, and it’s important to learn how you can build that equity over time. Ultimately, if you can put more money into your home by paying down your loan or improving the property, you can end up maximizing your total equity value. Plus, you can access your equity anytime by selling your property or opening a home equity loan or line of credit.
Learn more about home equity loans from DECU.