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How to's and money-saving tips from resident homeowner and mortgage professional, Cathy West

How to build equity in a home.

How to quickly build equity in a house

Home ownership is a big investment, and if you're planning to purchase a property, your best bet would be to plan to stay in that home for as many years as possible to make the most of that investment. By living in your home for at least five years, according to Realty Times, you can start to build equity, turning it into an emergency fund or increasing your profit if you decide to sell.

What is equity?
First time homebuyers may have never heard of equity before, as it's not something you encounter if you're renting. Equity is the difference between what you owe on a home, and what it's worth, according to Bank Rate. It's calculated based on a number of factors, including similar home values in the neighborhood, specific details about your house, and any improvements that have been made. Because there are a number of factors involved in calculating equity, your home's equity can fluctuate throughout the years. This is completely normal and expected. Your best chance at building equity, then, is to stay in the home that you purchase for a number of years and pay off as much of the mortgage as possible. 

There are a couple of other ways to build equity quickly. 

  • Traditional payments: Paying your mortgage on time every single month is crucial to paying down your principal – the amount that you borrowed initially – and thereby increasing home equity. If you're late on a payment, or don't pay in full, you'll be assessed late fees and other charges depending on your financial institution. Paying a partial amount of the bill  means that your payments only apply towards interest fees and not the principle itself. Over time, these interest payments increase because the principle isn't being lowered, and you'll find that paying off your mortgage will take years longer than expected.
  • Increased payments: While paying your monthly mortgage in full is key to building equity, you can jump start the process by increasing your payment amount above what is being asked. This can be a small increase, like rounding up your payment from $1256 to $1300 every month. You can also make larger increases, such as payment an extra $100 on top of your monthly mortgage payment. Eevery penny counts and helps to pay off your mortgage more quickly while building equity.
  • Home improvements: Making both minor and major home improvements is an oft-used method for building home equity. Adding a room, replacing a garage door, or replacing the attic insulation all raise the value of your home by making it safer and more attractive. Just be careful to assess the improvements you want to make before starting construction, since some improvements add more value to your home than others.
  • Additional payments: Every chance you get, add another payment to your schedule. You can do this by contributing every birthday dollar, career bonus, and monetary gift to your mortgage instead of using it for personal spending. Instead of just making higher payments on a regular basis, you might want to make another unscheduled payment mid-month. Some families also choose to become dual-income households, but continue to live on a single income. In this way, the entire second paycheck can be applied to the mortgage on a regular basis. This is a great way to accelerate equity building fast.

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