5 ways to build equity in your home more quickly (and why it matters)

For most people, buying a house is the largest purchase they’ll ever make, and it eventually becomes one of the bigger assets in their investment portfolio. But it’s not necessarily the home’s value that makes it an asset. Rather, it’s the equity you’ve earned — the difference between the value of your home and the debt you owe — that builds your wealth.

And as you get ready to retire, building the equity in your home can make a big difference in how comfortably you’re able to live. You may not be able to control how the real estate market and home values rise and fall, but there are some steps you can take to build your home equity faster.

1. Make biweekly payments

A simple way to more quickly build equity in your home is by making biweekly payments, instead of your typical monthly payment cadence. To find the amount you’ll pay biweekly, divide your monthly mortgage payment in half and pay that amount every two weeks, instead of using your monthly due date. Paying biweekly not only increases your full payments from 12 to 13 annually, but it also reduces the amount of interest that accrues between payments.

Say that you buy a home for $400,000 this month with 20 percent down and a 30-year fixed mortgage at 6.75%. Your monthly mortgage payment would be about $2075.51:

Now, let’s say that instead of paying $2,075.51 monthly, you instead pay $1037.76 every two weeks:

In this example, paying biweekly shaves some six years and more than $100,000 in interest payments off your loan.

💡Expert tip: Don’t forget to ask about prepayment penalties

While most traditional loans don’t include a prepayment penalty, some lenders charge a fee or penalty for paying off your mortgage early. Look for a prepayment clause in your loan contract or monthly statement, or call your lender directly to confirm whether it charges a prepayment fee.

Note that lenders are legally prohibited from charging a prepayment penalty on Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA) loans.

2. Put extra money toward your mortgage payments

Paying $50 to $100 more per month can make a real difference in building your equity and reducing the interest you pay over the life of your loan. It may not sound like a lot, but you’ll be surprised how quickly those extra payments can add up.

Let’s build on our previous example: A 30-year mortgage fixed at 6.75% on a $400,000 home with 20 percent down.

Here’s how much adding $50 or $100 to your monthly mortgage payment could save you:

While it may not be realistic for you to throw every extra dollar that comes in at your mortgage, you can still prioritize building your home equity in your plans. Make a rule for yourself that whatever funds you get through side hustles, second-act careers, bonuses, windfalls or gifts, you’ll put 50% aside to add to your monthly mortgage payments.

3. Refinance to a shorter term or lower rate

Refinancing your mortgage can help to increase your home’s equity in a few key ways. But keep in mind that refinancing options come with closing costs on the new loan amount, which you’ll need to weigh against any gain in equity.

• Reduce the loan term. Refinancing to a shorter loan term — for example, from 30 years to a 15-year or 20-year mortgage — will increase your monthly payment but also help you build more equity, pay off your loan sooner and reduce the amount of interest you pay over the life of your loan.

• Reduce the interest rate. Decreasing the cost of your loan is obviously beneficial. But if you can get a lower interest rate and keep up your current monthly payments, you can pay more against the principal of your loan, building your equity month by month.

• Consider a cash-in refinance. If you get a large bonus or monetary gift, a cash-in refinance is a way to pay off a large part of your loan’s principal with a lump sum, effectively reamortizing your loan — creating a new schedule of principal and interest payments. A cash-in refinance can net you a lower rate, make you eligible to drop private mortgage insurance (PMI) and provide you with instant equity.

You don’t have to refinance to pay a lump sum against your principal. But before you just send a large sum to your bank, make sure to confirm the total amount can be directed toward your principal.

4. Get rid of your private mortgage insurance

As soon as your mortgage’s principal balance falls under 80% of your home’s value, it’s time to ask your lender to cancel your private mortgage insurance (PMI).

PMI is insurance that protects your mortgage lender from loss if you default on your loan or aren’t able to repay what you borrow. Once you’ve built at least 20% equity in your home, you can request your lender to remove your PMI responsibility as long as you’re current on your payments, have no open home equity loans and make your request in writing.

If you don’t request the removal of PMI, your lender or servicer will automatically drop it when your loan-to-value ratio reaches 78%, thanks to the Homeowners Protection Act of 1998.

5. Renovate to increase your home’s value

It makes sense that spending money on your home will increase its value, but not all home improvements add significantly to your equity. And how the market will value your renovations can also change year to year. So, before you drop the cash to remodel or build, make sure you know how much of a difference your changes will make.

The biggest boosts come from curb appeal, according to Remodeling magazine’s Cost vs. Value data, from replacing your garage and entry doors to installing stone veneer. Replacing your siding and adding a wood deck can be pricier projects, but your return on investment is expected to be more than 80% for each.

Dig deeper: Top home renovations to increase your property’s value — and quality of life

4 tips for new homeowners

If you’re just getting ready to buy your first home or purchase a new home in retirement, here are ways to set yourself up for building equity in your new home.

1. Make the largest down payment you can. A big down payment is instant equity, yet it can also reduce your interest rate and keep you from having to pay PMI.

2. Get rid of your PMI as soon as possible. If you do get saddled with an extra PMI payment each month, make a plan to get your equity up to the required limit for your PMI to drop off. And check with your lender to make sure you know exactly what’s required.

3. Pay your closing costs out of pocket. It may be tempting to finance your closing costs, but paying them up front increases your equity and reduces the amount you’ll pay in interest.

4. Wait for a lower interest rate. You don’t want to wait too long, because every year you’re renting instead of paying on a mortgage is equity lost. But if signs point to lower rates on the horizon, it could be worth saving more toward your down payment until borrowing costs come down.

Dig deeper: Here’s how much a 1% change in loan rates actually matters

How long does it take to build home equity?

Your mortgage’s amortization schedule can show you how much of each of your monthly payments goes toward the equity of your home. Spoiler, though: In the first few years, it’s not much. In fact, if you just make your monthly payments on a typical mortgage, it can take between 5 and 10 years to increase the equity in your home by 15% to 20%.

The real estate and housing market can also affect your home’s value. Typically, the value of homes in the U.S. increases 4.6% annually, though that’s a long-term average that can vary widely year to year and even month to month. For example, at the end of May 2022, the housing index was at 17.19%, according to Federal Housing Finance Agency data, while it averaged only 2.6% in May of the following year.

Any step you take to increase your home’s equity can only build on top of the equity you’ll make over time. But the quickest ways to build equity are to pay down the principal of your loan either through a refinance or by contacting your bank to direct an extra lump sum payment to your principal without refinancing.

Why is building equity in your home important?

Building home equity is important because it adds to your overall assets and net worth. While not a liquid asset, your home equity can be a healthy part of your retirement savings and homeownership.

You may never need the money from your home equity in your retirement, but knowing it’s there as silent savings can help relieve some of the stress in an emergency or allow you the money and flexibility to:

And if that equity is still there when you’re gone, you can leave it as an inheritance to your beneficiaries.

Is it a good idea to borrow against your home equity?

You’ve earned the right to use your home equity when you need it. But having the security of a home can help you navigate your retirement issues with a lot less stress.

The benefits of borrowing against your equity include:

• Fewer costs and fees than a full refinance

• Waived closing costs, if you keep your account open more than three years

• Lower interest rates than credit cards or personal loans

• Fixed monthly repayments for home equity loans, which can help with budgeting

• Interest-only payments within a HELOC’s draw period, with some lenders allowing you to lock in a fixed rate before repayments start

Against these advantages is a clear and serious drawback: Because your loan is secured by your home, if you default on payments or are unable to repay what you borrow, you put your home at risk of foreclosure.

Depending on the way in which you borrow against your home, you may pay closing costs and annual fees. And if you pay off your loan or close your line of credit within the first three years, you might be responsible for any waived closing costs.

Dig deeper: 4 ways to get equity out of your home — and what to know before you apply

FAQs: Your home equity and retirement savings

Learn more about home equity — and how to use it — with answers to these common questions.

Is home equity the same as your home’s value?

Your home equity is based on your home value, but it’s actually is the difference between the assessed value of your home — or what your home is worth — and how much you owe on your mortgage. Learn more about this and other common home equity misconceptions in our roundup of the common home equity myths.

Can I qualify for homebuyer assistance if I’ve already owned a home?

Just because you’ve already owned a home doesn’t mean you’ll be denied assistance. Many homebuyer assistance programs are for first-time buyers, but they tend to use a liberal definition of “first time.” And there are a surprising number of options for senior buyers and retirees, for people who’ve purchased a home before or even people who need help paying off their current home. Learn more about how these programs work and whether you qualify in our comprehensive guide to homebuyer assistance programs.

What happens to your mortgage after you die?

Your home’s mortgage is treated a little differently from your other debt, which is typically settled through your estate before any assets are passed along to your heirs. Most mortgages aren’t transferable, which means the home must be paid off in full to transfer the property title.

But that also means only those who signed on to the loan can be held liable for a mortgage. Learn more about what happens to your mortgage after a death.

I own a home. Can I use home equity to invest in a rental or investment property?

You can use a home equity loan to buy a rental or investment property, but that doesn’t mean you should. Among the two most popular ways to tap into your home’s equity are home equity loans and home equity lines of credits. Both types of loans are ways to borrow from the money you’ve already paid into your home, based on your home’s appraised value. And there are no restrictions as to how you can use the money you borrow with a home equity loan. Learn more about the benefits and risks of tapping your home equity for a second home or investment.

Sources

About our writer

Heather Petty is a finance writer who specializes in consumer and business banking, personal and home lending, debt management and saving money. After falling victim to a disreputable mortgage broker when buying her first home, Heather set on a mission to help people avoid similar experiences when managing their own finances. Her expertise and analysis has been featured on MSN, Nasdaq, Credit.com and Finder, among other financial publications. When she’s not breaking down the complexities of finance, she’s a young adult mystery writer of an internationally acclaimed series — and counting.

Article edited by Kelly Suzan Waggoner