How to Build Home Equity and Access It When Needed

Home equity represents the portion of your home’s value that you own, and it’s crucial for building wealth through homeownership. Let’s dive deeper into how you can accumulate home equity without straining your budget and how to access it when necessary.

Understanding Home Equity: What It Is and How to Calculate It

Calculating your equity when you first purchase a home is simple; it’s essentially your down payment. For instance, if you make a $11,250 down payment on a $225,000 home, your down payment represents 5 percent equity.

From 2016 to the first quarter of 2018, most first-time homebuyers in the U.S. began with approximately 7-percent equity, according to Inside Mortgage Finance. This is promising, as it demonstrates that you don’t need to save for years to afford a 20-percent down payment before purchasing a home. Repeat homebuyers typically start with more equity, around 17 percent.

Six Ways to Build Home Equity Without Breaking Your Budget

Here are six methods for increasing your home equity. Some require time, money, or both. Consult with a lender to determine which approach is best for your situation.

Allowing Your Home to Appreciate and Other Ways to Build Equity

Equity can be built through appreciation over a short or long period, depending on the market. With rising home prices in recent years, appreciation has significantly benefited many homeowners.

Balancing Down Payment, Monthly Budget, and Savings for Home Equity Growth

While you can choose to make a more substantial down payment, waiting to save extra cash may not be in your best financial interest if you miss out on the chance to build equity through appreciation. Strive for a balance among down payment, monthly budget, and savings for other priorities.

Using Windfalls and Home Improvements to Build Home Equity

Employ work bonuses, family gifts, and inheritances to pay down your mortgage. If you make lump-sum payments, ask your lender to recalculate your payment based on the new, reduced balance.

Implement biweekly payments

Make mortgage payments every two weeks instead of monthly. Over a year, this will amount to 13 monthly payments, enabling you to build equity faster and reduce a 30-year mortgage by five to six years.

Reduce your loan term

Opt for a 15-year mortgage instead of a 30-year mortgage to build equity at twice the speed. However, be prepared for a significantly higher monthly payment and potentially more challenging loan qualification.

Undertake home improvements

Major improvements, such as new kitchens, additional bathrooms, or other rooms, can add significant value to your home. Ensure the cost of such improvements will yield the desired increase in value.

Accessing your equity

To use your equity, you must either borrow against it or sell your home. The three most popular ways to access your equity through borrowing are a home equity line of credit (HELOC), home equity loan, or cash-out refinance. Assess the advantages and disadvantages of each option.

With interest rates currently on the rise, these borrowing methods might become more expensive in the future. Consult with your lender to determine the most suitable approach for your needs.

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