6 ways to make your home equity work for you
Buy your home
To build home equity, you need to buy your home and quit renting. When you own your home, changes in real estate prices can help your equity increase over time. Under normal market conditions, home values appreciate every year. As the value of your home increases, so does the value of your home equity.
Consider an example in which you owe $200,000 on a home worth $250,000. Imagine that tomorrow, your home increases in value to $260,000. The value of your home equity increased from $50,000 to $60,000.
Any down payment you make when you first purchase your home also gives you equity.
Increase your mortgage payments
Another way to build your home’s equity is by making payments toward your mortgage. Unless you have an interest-only mortgage, every monthly mortgage payment you make gets split between interest and your principal balance. The portion that pays down principal helps you build equity by decreasing your debt.
Unfortunately, at the beginning of your mortgage loan, only a small portion of your payment goes toward principal because most of the money is allocated toward interest. The portion of the payment that pays down principal gets a little bigger each month, though.
You can also make additional payments on your home loan to build equity faster. When you pay more than the monthly minimum, all of the extra money goes to your principal balance.
When you reduce your mortgage balance more quickly by making extra payments, the interest due the following month will be less. As a result, the portion of your next payment that goes to principal will be slightly larger. Every time you pay a little extra on your mortgage, you can increase the rate at which you build equity in your home.
Before you do this, you need to make sure your lender doesn’t impose any prepayment penalties for paying the loan off earlier than planned.