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Home prices have risen dramatically in the past few years. In the three-year period starting in January 2020 to 2023, the median price of homes rose from $267,895 to $374,772 – almost a whopping 40% increase in value! Learn about more ways to build equity in your home.
Home equity is the difference between the value of your home and the outstanding balance on your mortgage. Equity is realized when you sell or refinance your home, and increasing home equity builds wealth and provides more options for homeowners. Here are practical ways to increase home equity, depending on your situation.
WHEN YOU ALREADY OWN THE PROPERTY
- Regular Mortgage Payments
Consistently making mortgage payments reduces your outstanding loan balance, increasing your home equity over time.
- Accelerated Mortgage Payments
Consider paying more than the minimum monthly payment to accelerate paying off your mortgage. Funds could become available by avoiding and paying off high-interest debt on credit cards or personal loans that would allow you to speed up principal payments on your mortgage to increase equity.
- Market Appreciation
Real estate values tend to appreciate over time. By holding onto your property and allowing it to appreciate, you can increase your home equity passively. This strategy does require patience and a long-term outlook.
- Refinance
If interest rates decrease or your credit score improves significantly, refinancing your mortgage can lead to a lower interest rate and possibly shorten the loan term to help you build equity faster. Depending on what options you choose, this can also improve your monthly cash flow. However, try not to refinance too frequently. Each time you refinance, you might reset the clock on your mortgage if you choose to keep the same number of years on the length of your refinanced mortgage as your previous one. Doing so could potentially delay the accumulation of home equity.
- Avoid Borrowing Against Equity
While it may be tempting to use your home equity for other non-home purposes, such as a home equity loan or line of credit (HELOC), it’s usually better to avoid borrowing against your home for something like a car purchase or paying off credit card balances. It will erode your equity and only shift existing debt without actually paying it off.
- Make the Effort to Maintain your property
Regular maintenance and upkeep are crucial for preserving and enhancing your home’s value. Stay on top of home repairs and keep up with any landscaping such as lawns, bushes, and trees.
- Home Improvements
Upgrading your home can significantly increase its value. It’s always good to focus on renovations with a high return on your investment, such as kitchen or bathroom remodeling, bedroom/bathroom/deck/patio additions, and new energy-efficient appliances. The age of your roof could also determine if it’s time to re-roof your home.
WHEN SELLING THE PROPERTY
- Curb Appeal Enhancements
Improving your home’s curb appeal makes it more visually inviting and can boost its value. Maintain a well-manicured lawn, invest in landscaping, update interior and exterior paint (ideally with neutral colors), and consider minor cosmetic upgrades like a new front door or updated lighting fixtures inside and outside the house.
WHEN LOOKING TO PURCHASE A PROPERTY
- Make a Larger Down Payment
When purchasing a home, making a larger down payment reduces the amount of your mortgage loan, increasing your equity from the start.
- Pay Off Debt
Reducing overall debt, such as credit cards or personal loans, can positively affect home equity. Lowering your debt-to-income ratio before you apply for that mortgage makes you a less risky borrower and may qualify you for better loan terms.
- Location Matters
The old expression “location, location, location!” is always true in the real estate world! Investing in a desirable location can positively affect your home equity over the long term. Properties in sought-after neighborhoods or areas with good schools, amenities, and transportation tend to appreciate in value faster over time.
Remember, increasing home equity is a long-term process! When deciding which strategies to pursue, you should always weigh your financial goals, market conditions, and personal circumstances before reaching any decisions. Consulting with a qualified real estate professional or financial advisor can help you reach a decision that fits your situation and that you’re comfortable with.