A home purchase brings together so many things under one roof: dreams, shelter, status, maybe a passport to better schools and neighborhoods. And one more thing: It gives you a forced savings account.
It does that by letting you build home equity, which is the difference between your home’s market value and what you owe on it. Your equity increases with each house payment you make. When home prices rise, your equity grows faster as your home’s value increases.
To step on the gas and speed up the growth of equity, you’ve got two main tools: You can increase the home’s value or reduce the mortgage debt. Or both.
1- Make a big, fat down payment
- Get equity from the start with a larger down payment, since that is instant equity.
- Put down 20% or more of the property’s value for a bonus
2- Get a 15-year mortgage
- “Homeowners should concentrate on reducing their mortgage in order to gain equity,” says Roslyn Lash, a real-estate broker who runs Youth Smart Financial Education Services, which aims to educate teens and millennials. Refinancing into a 15-year loan can be “a great way to build equity because a lower rate means that more money is applied to the principal,” says Lash, who also is an accredited financial counselor.
3- Improve the property
- Some remodeling and improvement projects boost a home’s equity. But not all do. The average payback on common upgrades is 64 cents for each dollar spent, according to Remodeling magazine’s research. And that’s if the home sells within a year.
4-Pay more on the mortgage
- Paying more can be a good option. If you decide to do this, make sure the extra money is applied to your mortgage principal.
- One Common way of adding to your monthly payment: Boost the payment by an amount equal to a twelfth of a payment. By the year’s end, you’ll have made an extra payment.
Stockpiling home equity gives many savers an exceptional feeling of satisfaction. Those forced savings also are a mighty resource to tap if you’re hit with an unexpected expense or want a boost on one of life’s milestones, like helping a kid through college or upgrading the home.