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Home equity—the portion of your house that you own outright—increases naturally and gradually as you continue to make monthly mortgage payments. If you're so inclined, however, there are steps you can take to speed up that process. Here are some tips for quickly building home equity.
1. Make Extra Payments Toward Your Principal
Even one extra mortgage payment over the course of each year can help you increase your home equity, especially if you specify that the extra payment is applied to your loan's principal balance instead of interest.
One method for doing this is to make a payment in the amount of half of your mortgage bill once every two weeks, rather than one full payment each month. Because there are 52 weeks in each year, this means you make 26 half-payments, or 13 full payments, every 12 months.
Other tricks for increasing your mortgage contribution include rounding up each mortgage payment to the next $100 or $1,000 increment or using your income tax refund or holiday bonus check as an extra mortgage payment.
Whichever tactic works for you, be sure your mortgage servicer (the company that receives your payments) knows to apply any extra payments to your loan principal. If you don't, they may automatically apply these extra funds toward interest, which won't help you quickly build equity.
2. Remove Private Mortgage Insurance
If you put down less than 20% of your home's purchase price, it's likely you're paying for private mortgage insurance as part of your monthly mortgage bill. A major benefit of boosting home equity is the opportunity to remove the cost of this premium from your mortgage payments.
With a conventional loan, mortgage insurance premiums can be removed when you reach 20% equity based on your original mortgage payment schedule. However, some lenders won't automatically cancel your PMI at 20%, so you may need to contact your lender to request cancellation. If you don't, law requires your lender to cancel your PMI when you reach 22% equity.
How long it takes to reach the 20% threshold initially depends on the amount of your down payment. But if you take advantage of the strategies described here and accelerate your accumulation of equity, you can petition to have the premiums removed sooner. This typically requires a new appraisal by a professional of your lender's choosing, whose fees you must pay.
With an FHA loan, your mortgage insurance requirement expires after 11 years if you put down at least 10%. But you'll have to refinance your loan to have it removed if you put down less than that.
Whichever method applies, when mortgage insurance premiums are removed from your mortgage bill you can build equity by continuing to pay your original payment amount, making sure the amount previously used to cover mortgage insurance is applied against your mortgage principal. This is a variation on the "make extra payments'' strategy described above, but one that doesn't require any additional monthly expenditures.
3. Invest in Home Improvements
If you have a mortgage—no matter whether you've just made your first payment or only have a few years to go—any increase in your home's market value means you'll build home equity more quickly.
Let's say, for example, that you put down 20% on a home and take out a $300,000 mortgage at a 4% interest rate. Your monthly payment is just over $1,430, and your total payments after one year total a little more than $17,000. After a year of mortgage payments, according to a typical amortization schedule on a 30-year loan, your equity will increase by roughly $5,300—or less than 2% (because, once again, most of your early mortgage payments are applied to loan interest, not principal). However, if you make improvements that increase your home's market value by 5%, 10% or any other increment over that same year, that entire increase will add directly to your equity position.
If you have the budget, replacing outdated windows and improving insulation can increase market value and yield a partial near-term return quickly by reducing your heating and cooling bills. Bathroom and kitchen renovations also can boost market value and your equity stake, but these enhancements don't all have to cost big bucks. In fact, some costly additions, such as built-in swimming pools, may not add to property value at all as they may turn off as many potential buyers as they attract.
If you're on a tight budget, applying time and elbow grease can make the term "sweat equity" come alive: Sprucing up your property by grooming or replacing overgrown or sickly shrubs, fertilizing the lawn and treating it for weeds, making minor cosmetic repairs and repainting trim and doors can bring meaningful increases in "curb appeal" and market price for a relatively modest financial investment.
Consult a real estate professional for advice on which types of improvements will bring the best returns in your local market.
4. Refinance Your Mortgage
The goal of refinancing a home loan typically is to get a better interest rate or to lower monthly mortgage payments—but it can also help you accelerate equity accumulation. Taking out a new loan that shortens your repayment term from, say, 30 years to 20 or 15 can help you build equity more quickly. Initial payments on the new loan will still be mostly interest, but even the earliest installments will cover a larger portion of your principal than those on a loan with a longer repayment period.
If you're considering a mortgage refinance, be sure to check your credit before submitting your application for the new loan. If appropriate, consider taking a few months to optimize your credit profile before seeking a new mortgage. If you're not sure where your credit stands, you can get your credit report and FICO® Score☉ for free from Experian.
5. Live in a Hot Housing Market
This isn't exactly an actionable step you can decide to take, but it's one many American homeowners have benefited from since the beginning of this decade: As new home construction stalled amid materials shortages related to the COVID-19 pandemic, housing supplies tightened and home prices increased significantly across much of the United States. Like price increases connected with home improvements, these market-based price hikes contribute directly to your equity stake in the property.
Under ordinary market conditions, well-maintained homes appreciate in value by about 3% each year. The seller's market that began around 2020 has seen far more rapid growth in much of the country. Economic forces affect communities and neighborhoods within them differently, so your home value may have benefited to a greater or lesser extent, but it may be worth consulting a real estate professional about your property value. If you're planning to sell or you want to request removal of private mortgage insurance, a reappraisal might prove helpful.
The Bottom Line
"Mortgage borrower" and "homeowner" are often used interchangeably, but as long as you're repaying a home loan, you only really own the equity you've accumulated in your property. Applying tactics listed here to help accumulate home equity more quickly can get you to the point of full homeownership sooner—or leave you more money to work with when you sell your current home in order to buy a new one.