10 ways for building equity in your home
1. Make a large down payment
The larger your down payment, the more immediate equity you have in your home. A substantial down payment reduces your loan amount, leading to quicker equity building as you pay off your mortgage. To help you plan your next home purchase, try HomeLight’s down payment calculator.
2. Refinance your loan to a shorter term
Refinancing to a shorter-term loan, like switching from a 30-year to a 15-year mortgage, can accelerate the rate at which you build equity, as more of your payment goes toward the principal balance.
3. Eliminate mortgage insurance
If you have conventional financing and have reached 20% equity, you can typically request to drop your private mortgage insurance (PMI), effectively reducing your monthly expenses and allowing you to build equity faster. Learn more about mortgage insurance at this consumerfinance.gov page.
4. Increase your home’s value
Enhancing your home through renovations or upgrades can significantly boost its market value, thereby increasing your equity. Focus on improvements that offer the best return on investment. (We’ll share the top ways to increase home value later in this post.)
5. Pay more than your minimum payment
Paying more than the required amount on your mortgage each month can shorten the loan term and build equity quicker. Even small additional payments can make a significant difference over time.
6. Consider switching to biweekly payments
Making biweekly mortgage payments instead of monthly can result in one extra payment per year, reducing your mortgage balance and increasing equity more rapidly.
7. Avoid rolling closing costs into your home loan
When refinancing, pay closing costs upfront rather than adding them to your loan balance. This prevents decreasing your equity and increases the rate at which you build it.
8. Stay in your home and let it appreciate
The longer you stay in your home, the more likely it is to appreciate in value, especially in a rising real estate market. This natural appreciation boosts your equity over time. Building equity is why the 5-Year Rule is commonly cited in residential real estate planning.
9. Avoid borrowing money on your equity
While home equity loans can be tempting, using your equity as collateral can decrease the equity you have built up in your home. It’s great to have equity when you need it, especially in cases of emergency or opportunity, but weigh the benefits carefully. Be careful not to let your equity be chipped away for low-priority expenses.
10. If you do withdraw equity, reinvest in your property
If you decide to tap into your equity, consider using the funds for home improvements or other investments that could increase your home’s value, thereby replenishing and potentially increasing your equity.
