Building Equity in your Home in 10 Easy Steps

October 2, 2020
photo of updated house that improves equity

It was not long ago when tapping into the value of one’s house through a line of credit was considered the most prudent financial decision. However, now the tide seems to have turned the opposite way where owning the house and the value of the property is far more important than gaining temporary spending power through it. Lack of equity can seriously endanger the ownership of one’s house and negative equity comes with even worse consequences. While it may be attributed to the bursting of the housing bubble, prices of homes crashing down, as well as zero down mortgages, the good news is that the process is still reversible.

One option that many people are choosing these days is to walk away from housing properties altogether, but for those who want to ride it out and keep their houses, there are several ways to build equity in home. Then there is also the solution of selling the house with a lot of mortgage and transferring mortgage into another home. There are numerous ways of getting out of debt and loans. Some of the most effective ones of building equity are described below:

Get the principal forgiven if you have ‘underwater mortgage’

Let’s start with the worst case scenario and then move to better options. If you have an underwater mortgage, which means that the value of the house has fallen even below the value of the loan you took out to buy that house, you may be able to get your bank to forgive you the principal amount and only require interest payments from you. While this may only bring you just above the underwater scale, it will be effectively building up equity in your house.

Wait out the slump

One of the easiest ways of recovering home equity is through increased price of houses. Since inflation is an unavoidable, almost persistent concept of modern day economy, it is only a matter of time before prices start to recover. For those who can afford not to liquidate whatever equity they have left and don’t need an underwater mortgage forgiveness option, they can simply keep and improve their equity by giving it time.

Home improvements go a long way

While it may not cost a lot to re-paint or repair small areas here and there in the house, the better the condition of the building, the higher its market value. As the price increase itself is a direct way of recovering equity, thereby any improvement around the house that increases the property price or the asset price itself will help you build equity in your house.

Maintenance

While on one hand improving the condition of the house is useful, on the other hand it is equally important that the price of the home does not depreciate either. Therefore, avoid ruining walls with children’s paints or digging holes in the backyard or putting in too many nails in the walls for hanging pictures or paintings. At the end of the day, if the house can fetch you a higher selling price, it is indeed providing higher equity.

Sell the house to buy another and make it look good

It is no secret that marketing and presentation go a long way in establishing higher quality and consequently getting higher prices. It is not only the clear and honest communication about the state of the building but also small top ups, like a clean carpet, new furniture or clean walls that can make a lot of difference. Present the house in its best condition at the time of listing it, and you might be able to sell it at a favorable price. That will not only allow you to invest in housing property somewhere else with a lower mortgage but will also get you higher equity.

Go big on down payment

Down payment seems to get a bad financial reputation as it means getting your finances stuck in a property for some time without it reaping you any quick returns in cash. However, a big down payment means lower loan to value ratio, which translates into lower interest rates, and also allows for easier financing opportunities. So when you are transferring your housing property, go for a larger down payment to automatically have higher equity in your hands. Over time, lower interest rates will also mean more money saved and therefore more equity created.

Maintain your mortgage payments

Now if you are not among those who wish to sell the property or even wait it out, then mortgage repayments are the way for you to build up equity. Irrespective of how many mortgages you have taken on the house, with every payment the debt portion decreases and equity increases. Therefore, one of the quickest and easiest ways to ensure that equity keeps building in your home is to make sure not to delay or miss out on mortgage installments that are regularly due. Do not confuse the interest payments with the principal payments. Since the equity building will only be possible through repayment of the original loan and not only interest.

Larger payments on mortgage

As has been described how repayment of mortgage allows build up of equity, if you can afford higher payments on installments, paying them will speed up the equity building process. You can also make up a newer plan for repayment of mortgage whereby not only larger amounts are paid with every installment but also the number of installments may be increased. This means that instead of monthly payments, biweekly mortgage repayments are made. The sooner the mortgage is paid off, the sooner the equity will be gained in total.


Re-mortgage for a shorter mortgage

In case your original mortgage installments cannot be changed or the repayment amount is small enough to drag down the equity build up for years, the alternative method is to get another mortgage with shorter repayment time and use the entire amount to pay off the initial mortgage lump sum. However, in case of any of these three options – higher payments, increased payment frequency, or shorter mortgage to pay off longer mortgage – the point to remember is the ability to make the new payments on time. If the payments are delayed or missed, the interest will continue to accrue and that will further delay the process of recovering equity.

Avoid getting another mortgage for other reasons

If you are getting a second mortgage to pay off the first one only, that is a direct step towards getting your house equity back. However, if the second mortgage money is used for other short term or long term expenses, that will further burden down on the equity and will work against the recovery process. Therefore, avoid refinancing the house for any purpose other than quick repayment of mortgage altogether.