Written by: Olivia Forgette

Finding your dream home is important for making lasting memories, having a safe environment for you and your family, and enjoying stability in your life. Another important factor to owning property is gaining financial stability and wealth over time. We are here to share with you our top tips for building home equity.

Home equity is the market value of your home minus anything you owe on the property.

For a simplified example, let’s say you owe $100,000 on your current home mortgage and your home has been appraised for $500,000. This would mean the home equity you have is $400,000.

Equity provides you as a homeowner flexibility within your financial circumstances, including the ability to invest money (which helps build wealth!). Building home equity is also often a key component to retirement financial planning. Some other important ways that you can utilize home equity include:

  • You can use a home equity loan to borrow against the value of your property
  • Home equity allows you to make a profit from your home, even if you still owe on your mortgage
  • You can build long-term wealth by accumulating home equity

Now that we understand why home equity is something you should care about as a homeowner (or potential homeowner!), let’s talk about tips for building home equity.


Start with your down payment

Believe it or not, building home equity starts the moment you close on your home purchase.

Our first tip to building home equity is by starting your loan with a larger down payment. This will set you up for more home equity wealth in the future. Why is this?

If you begin your loan with a larger down payment, you will in turn need to finance less of the home value in your mortgage. Remember, home equity is what you own, not what you have financed.

Having a larger down payment also reduces your monthly mortgage payment, plus, it can help you get more competitive interest rates, and will leave you paying less interest over the course of the loan. If you can afford over 20-percent of the purchase price as your down payment, you can also prevent yourself from needing private mortgage insurance.

Bonus tip: If you can avoid needing private mortgage insurance by making your down payment more than 20-percent, this will help you save monthly which will help build your home equity faster!

If you aren’t able to pay over 20-percent down, there are some other ways to remove private mortgage insurance:

  • Make your monthly mortgage payments until the balance owed equals 80-percent of the home’s original value
  • Request from your lender for the private mortgage insurance to be removed once you reach 20-percent equity in the home (either through making mortgage payments, or home value appreciation)


Pay your closing costs

Our next tip for building home equity is to pay your closing costs out of pocket if possible. It’s not uncommon for your mortgage lender to roll any closing cost fees into your mortgage. This is a great option if you don’t have a lot of liquidity in your finances, but ultimately doing this will make your monthly payment higher. It will also add to the amount of interest you pay over the life of the loan.


Increase your payments

Another great way to build your home equity is to increase your mortgage payments. There are two ways you can do this:

  • Make bi-weekly payments. Split your total monthly payment into two payments which will result in 13 full payments annually, rather than the standard 12 payments. This reduces accrued interest over the course of the loan, allowing you to pay off the loan early while paying less interest over time.
  • Increase your monthly payments. Pay extra each month while requesting the lender put the extra funds toward your principal (rather than toward interest or taxes and insurance). Paying extra toward the principal will again lower the amount of interest you pay in your loan, and in turn increase your home equity.


Add value

Doing upgrades and improvements to your home is a great way to not only make your home continue to feel comfortable, but it also is an awesome way to add home equity.

You should always do research on what improvements you plan to make and the average return on investment (ROI) that upgrade will give you. Some popular options for home repairs to add equity to your property include:

  • Make necessary obvious repairs. These are things like a broken window, your dishwasher that has had a slow leak for a while, that hole in the drywall, etc.
  • Upgrade your appliances. On average, new appliances in your home add about 60-to-80-percent return on investment.
  • New flooring. New flooring can really make an impact in the appearance and function of your home. On average new flooring offers an ROI of about 70-to-80-percent.
  • Fresh paint. Repainting is a great way to add value to your property. On average interior paint adds 105-percent ROI, and exterior paint adds about 80-percent return on investment.

Of course, there are many other updates you can do to your home to add value. Be sure that whatever you decide to upgrade, you do your research to ensure that it is worth your while financially.


Market value

Although the real estate market is ever-changing and can be unpredictable at times, it’s a good rule of thumb to know the longer you own your property, the more home equity you will build. Although the market goes up and down, the general trend is that home values increase over time. Waiting for your home to have a higher market value will help you maximize your home equity when you sell.