As of November 2022, mortgage rates have doubled since the beginning of the year, and…
Homeownership comes with a lot of benefits, like being able to paint your walls whatever color you want and not worrying about rising rent. But there’s one huge financial benefit that you may want to think more about—home equity.
For most people, a home is the most valuable asset you have. Equity is the amount of your home you actually own or the difference between the home’s estimated market value and the amount you owe. So, if your home is worth $400,000 but you owe $250,000 on it, your equity in the home is $150,000.
It can be easy to miss your growing home equity, but it’s a powerful financial tool for addressing needs and meeting goals both now and down the line (if you’re curious how your home equity can work for you, check out our free tool here for a detailed report).
So, what can you do to build that home equity? Here are a few ideas.
1. Choose a Shorter Loan Term
If you want to build equity quickly, there are few better ways to do it than by choosing a shorter loan term. When you choose a shorter term (15 years rather than 30, for instance), much more of your monthly payment is going to the principal of the loan rather than interest. This really adds up fast.
Even better, shorter loan terms almost always come with lower interest rates, which will also save you money. It’s a double whammy!
2. Do Home Improvements
Now, we’re the first to say that not all home improvements are created equal when it comes to the amount of value you add to your home. In fact, we wrote a blog post about that very thing.
But strategic home improvements can help you maximize your dollar and maximize the equity you’re adding to your home. In 2020, the best improvements in our region included things like a garage door replacement, a minor kitchen remodel (worth more percentage-wise than a major kitchen remodel), and a roofing replacement. These are smart ways to increase your Sacramento home equity.
A note: make sure that you don’t over-improve your home given the neighborhood it’s in. If you’re the only one in your neighborhood with a luxury kitchen, it’ll be worth less than it would be in a neighborhood with more comparable kitchens.
Along these same lines, keeping your home well-maintained helps preserve the equity you already have.
3. Make a Larger Down Payment
Think of a large down payment as a jumpstart to your home equity. Putting more down is an instant boost. Plus, a larger down payment usually gives you a lower interest rate, which will also help you build more equity.
However, a word of caution: even though a large down payment comes with many benefits, you should consider how much you’ll have left in savings for emergencies and other needs before you make this move. There are plenty of low down payment loans available, and they can be a good option, too.
4. Make Extra Payments
It can be smart to make extra payments on your mortgage if you want to build up home equity. Even two extra payments a year toward principal can significantly lower your loan term.
Two things you’ll want to check with your loan provider before you go ahead: First, make sure you won’t be penalized for making early payments. Two, make sure that the payments are going strictly toward principal and not interest.
Here are some easy ways to make extra payments:
- Bi-weekly payments instead of monthly payments (which equals two extra payments a year)
- Add an extra 1/12th of a payment each month (which equals one extra payment a year)
- Put any bonuses or tax refunds toward principal
One note: mortgage debt is often the least expensive debt you can have. If you’re carrying high-interest debt, like credit card debt, it probably makes more sense to pay that off before making extra mortgage payments on your mortgage. After all, that high debt load is impacting your equity as well. However, we are not financial planners, and these situations can be complex, so we highly recommend that you chat with an expert about your situation.
5. Wait for Your Sacramento Home Equity to Build
Last, but certainly not least, you can wait for the value of your home to rise. With Sacramento’s current hot housing market, you won’t be waiting long. Over time, your Sacramento home equity will likely grow nicely. Even better, this is a totally passive way to build your equity—just sit back and let it happen!
If you’re curious what your home equity can do for you, check out our Homebot tool here. It’s really cool for showing you how your home can help you reach your financial goals, plus you get a free market value report, so check it out!
And of course, if you’re ready to buy a home so you can start building up some home equity of your own, just go here to get started.