Build Equity Faster in Your Home
2 Ways to Build Equity in Your Home
Equity is the difference between what your home is worth and what you owe. Ideally, as the value of your home goes up and the unpaid balance goes down with each amortized payment made, the equity grows from two directions.
This dynamic leads to increasing your net worth much faster than many other investments.
Value – Limited Control
A homeowner has primarily 2 ways to increase value:
- Maintain the property to avoid depreciation
- Make good decisions on capital improvements
After that, real estate appreciation is controlled by supply and demand and the economy.
Mortgage Management – Total Control
A homeowner can, however, greatly affect their equity with savvy Mortgage Management. Selecting a shorter term mortgage at a lower interest rate has a significant impact on equity build-up.
- Lower interest rates amortize faster than higher interest rates, thus building equity
- Currently, a 15-year mortgage typically carries a 1% lower interest rate than a 30-year mortgage
Compare the difference in net equity between a 30-year and a 15-year mortgage.
- The payments are higher on the 15-year loan because it pays off faster.
- However, if a person can afford the higher payments of just $362.53 more per month in this example, they earn a substantial savings at the end of 7 years.
- Even after you adjust for the higher payments, the increased equity is $17,236 at the end of the seven year holding period.
Make Additional Principal Contributions
Another decision within your control is to make additional principal contributions along with the regular payments. Whether you make an occasional lump sum payment or regular monthly contributions toward principal reduction, benefits include the following:
- Save Interest
- Build Equity
- Pay Off the Loan Sooner
Estimate your personal savings with our Equity Accelerator.
Let us know if we can put you in touch with a lender to help you “manage your equity”. This service is part of our Better Homeowner series.