Home equity is the difference between the value of a house and the mortgage amount you still owe to purchase it. For example, if the value of the property is $300,000 and you owe $200,000 on the mortgage, the home equity is $100,000. Simply put, you own $100,000 in home equity in this particular case. 

There are two fundamental ways to build home equity: decreasing the amount you owe on a mortgage or increasing the value of your home. Making extra payments on your mortgage can increase your home equity. Here is an explanation of the importance of building equity and the strategies on how to build it. 

Importance of Building Home Equity

Many people say that a home is an investment, which is true because the equity in it is a way to build your net worth. Subtract your assets from your liabilities, that is your net worth. Your home equity is part of your net worth, which comprises your savings, retirement plan, and other assets. 

Another advantage of building equity is that you can use it as collateral to borrow money. A home equity line of credit or home equity loan allows you to borrow against your home equity. The catch with using your equity to borrow money is that you could lose your house if you fail to pay back the loan. 

You can also make more money from selling your home if the property has high equity. Typically, you need to pay your mortgage balance first if you successfully sell your house. So, if you decrease what you owe on your mortgage (which means increasing your equity), you keep a great deal of the proceeds from the home sale. 

Ways to Building Home Equity

There are various ways to build home equity quickly and with a little bit of patience. Take note of these ideas on how to do it. 

Make Biweekly Mortgage Payments

One way to build equity is to make extra payments on your mortgage. For instance, you can switch to biweekly mortgage payments. Instead of paying once a month, you make half of the usual monthly payment every two weeks. 

This strategy helps you make thirteen full mortgage payments instead of twelve every year. You can pay off your mortgage earlier if you make biweekly payments. 

Improve the Home

You can add amenities or make some updates to boost the value of your home. Improvements to the kitchen and bathroom can add value to your property. You can also make your house more energy-efficient since homebuyers want a home where they can save money on electric bills. 

Another affordable way to increase home value is by improving its curb appeal or painting the house anew. 

Make a Big Down Payment

You can build equity through the down payment you make when buying a home. Typically, you need to make a down payment of at least 3% of the purchase price, but you can make a higher down payment of as much as 20%.

This sum goes to your home equity because the down payment is your own money from your pocket. If you can make a bigger down payment, the better because it instantly goes to your home equity. 

Pay the Mortgage Faster

There are many ways to pay your mortgage down faster. Tax refunds, bonuses, inheritances, or if you are lucky to have an extra budget, you use it to decrease your mortgage balance. 

You can build equity in your home faster if you pay your mortgage faster. By the time you finish paying your mortgage, you will get 100% home equity. Moreover, you can save money on interest because your lender charges interest on your remaining balance. If you pay down the principal balance quicker, the less your interest charges will be. 

However, be careful with paying down your mortgage faster. Some lenders impose prepayment penalties, which the lender charges if you pay off the mortgage earlier than its term.

Refinance to a Shorter-Term Home Loan

Another strategy to increase equity in your house is to refinance to a shorter-term loan. This way, you can pay off your mortgage faster and save money on interest that you must pay for a longer-term loan. 

However, a shorter-term loan means you have to pay higher monthly payments. Think twice about opting for this strategy, and be sure you can afford to refinance to a shorter-term loan. 

Final Thoughts

Now you know the significance of building home equity and the various ways how to do it. The fastest way to have that equity in your home is to pay down your mortgage or make a bigger down payment. Doing some improvements and updates to your property can increase its value and thereby build its equity.