How to build equity in your home

What is home equity?

Home equity is essentially how much of your property you actually own. Increasing the amount of equity you have in your home is a strategic way to build wealth. It can have several benefits later down the road. For example, a higher home equity increases your overall net worth and may allow you to retain more profits when you sell your home.

“The equity in your home can be used to offset the cost of a new home purchase if you move, lowering your future mortgage amount,” said Joseph Eck, a certified financial planner and the owner of Stage Ready Financial Planning in Dayton, Ohio. “It can also be an emergency resource that can be tapped by applying to open a home equity line of credit (HELOC) or home equity loan.”

You can borrow money using the equity you've built in your home with a HELOC, reverse mortgage, cash-out refinance or home equity loan. This type of financing can help cover emergency expenses, educational costs, debt consolidation and more. However, there may be other criteria you have to meet, such as home equity loan requirements.

“All of that said, the most important part of building home equity is the process of eliminating debt,” Eck continued. “Paying off your mortgage can create freedom in your monthly spending/budget as well as the peace of mind of knowing that you own your home outright.”

How much equity do I need to get rid of PMI?

Lenders generally require private mortgage insurance (PMI) to protect their investment if you don't make a minimum 20% down payment. The lender adds PMI to your monthly mortgage payment, which can slow down the speed at which you build equity in your home.

While different mortgage lenders may remove PMI based on varying standards, once you pay 80% of your home's original value, you can request your servicer cancel it.

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Tips to increase your home’s value

One way to build your home equity is to increase the market value of your property. Renovating your home can be an effective way to accomplish this. For example, you can:

• Increase square footage: One of the best ways to improve the value of your home is to increase its square footage. You could add an extra bedroom, bathroom or an in-law suite.
• Repaint: Some renovations are simple, like adding a fresh coat of paint to the walls. Look into which color schemes tend to perform best when reselling a home, such as whites and neutral tones.
• Upgrade energy efficiency: Making your home more energy efficient can also increase its level of desirability. For example, you can replace windows, install a smart thermostat, purchase energy-efficient appliances or add insulation.
• Improve curb appeal: The outside of your home is the first impression potential home buyers have of your property. Maintaining your lawn, landscaping or replacing your exterior doors can add market value.
• Update your kitchen: When searching for a home, buyers often prioritize an updated kitchen and may be willing to pay more for it. If updating your kitchen is too expensive, you could look into smaller remodels, such as replacing appliances or the hardware on your cabinets.

While renovating your home could increase its value, you can also wait for it to appreciate since real estate generally increases in value over time. The value of your home can be significantly impacted by the state of the housing market, so it might be wise to wait for a strong market before selling.

How to reduce your mortgage balance

Another way to increase your home equity is to decrease how much you owe on your mortgage. There are several ways you can do this:

• Make a bigger down payment: Your down payment is your initial home equity. While you typically only need between 3% and 5%, making a larger down payment can increase your starting equity in your home.
• Pay closing costs up front: Your lender may offer to include your closing costs in your mortgage. While this may be tempting, it can make it more challenging to build home equity.
• Make extra mortgage payments: Once you buy your home, you can increase your home equity by paying extra on your mortgage. You can pay extra on your regular payments or make bi-weekly payments.
• Refinance: You can also look into refinancing your loan for a lower rate or shorter term. It can help you pay less interest and pay off your mortgage faster.

Bottom line

The difference between the market value of your property and how much you owe on your mortgage is your home equity.

Building equity in your home is important because it can increase your financial stability, improve your net worth and help you retain more profit when you sell your home. You may be able to use your home equity for future financing.

You can build your home equity by increasing the value of your property and reducing the amount you owe on your mortgage.