How To Build Equity In Your Home

One of the most important considerations of any homeowner is to understand how to build equity in your home. Simply put, equity is the difference between the balance of your mortgage obligations and the value of your property. When the value of your property increases and you reduce your debt by making mortgage payments, your home equity increases.

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In recent years home prices have appreciated, making homes across the country more valuable. Certainly some regions appreciated quicker than others. Take California as an example. The state saw a rise of 27.18 percent in home value from the third quarter of 2003 to the third quarter of 2004. During that same time period the Office of Federal Housing Enterprise Oversight reported a 12.97 percent increase for the national housing market on the whole. While this was all taking place another unique situation was happening at the same time.

Home mortgage interest rates were dropping at a historic low, which in laymen’s terms means that less of each payment was going to interest and more was going to the principal, resulting in lowering balances quicker. While this should have made many Americans wealthier, a large majority were using their new increase in home equity to take out a home equity line of credit in order to pay off other debt, finance college tuitions, and make improvements on their house. This all resulted in a historic drop in home equity levels and a drop of money in the bank.

What this all means to you, the homeowner, is that equity can be an easy solution to gain wealth but can become a distraction when the market is performing well and interest rates are down. Overall, building equity can be a simple process if you follow a few guidelines.

The most common ways to add equity to your home include increasing your initial down payment, making extra principal payments, choosing a shorter term for your mortgage, and making improvements to your home. Another obvious approach is to choose a 15-year time period rather than a 30-year loan. The monthly payments will be higher and it will be more difficult to qualify for the loan but you will pay it off in half the time. Also, a 30-year mortgage with a bi-weekly payment plan will enable you to build equity more quickly than a normal 30-year mortgage. With this option you make a payment every two weeks and will actually pay off the loan in 20 years. Though not all lenders offer this type of loan.

Making home improvements is another approach to consider when building equity. Home improvements could include anything from making additions to your home, upgrading rooms or making renovations, or simply repairing any faulty equipment like water heaters or a furnace. Do keep in mind however that getting too fancy could actually negatively affect the resale value, so make sure to do your research beforehand.

Overall there are many ways to build equity besides just making your monthly mortgage payments. But make sure you check all your available resources to help you determine which option is best for you.