How to Maximize Your Home Equity

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If you bought a house for more than just a place to live, but rather an investment vehicle too, you’ll want to maximize your home equity. While it can seem like it takes forever to build up any equity in your home, especially at the start of a mortgage, there are ways to make it grow faster.

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You can use your home equity in a variety of ways. Many people use it as a forced retirement savings account. They use the equity to either downsize to a smaller home and then live off the cash or they take out a reverse mortgage on their home and live off the funds.

Just how do you get the most out of your equity, though?

Make Larger Mortgage Payments

Your minimum mortgage payments are the payments shown on your payment coupons. The keyword here is minimum. Most mortgages allow you to make extra payments towards the principal. This means you may pay your loan off sooner and build equity faster. Just how do you make extra payments?

You can decide the best way for you. Some people just throw extra money at their mortgage when they have it. They don’t have a rhyme or reason for the extra payments. Others have a schedule they follow such as:

  • Pay an extra $100 towards the principal each month
  • Pay an extra 1/12th of the mortgage payment each month to make one extra payment each year
  • Pay one full extra mortgage payment once a year
  • Put any windfall money, such as tax refunds or bonuses towards the loan’s principal

No matter which method you choose, extra money towards your principal helps you build up equity faster.

Fix Your Home Up With the Right Improvements

Certain home improvements help increase the value of your home. This is like an automatic increase in equity. Let’s say you remodel your kitchen and increase the value of your home $5,000. That’s an instant $5,000 increase in your equity.

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Take caution when remodeling your home strictly for the value, though. Not all improvements give you a dollar for dollar return on your investment. It’s best to talk to a real estate professional or appraiser in your area to see which improvements hold the most value. Sometimes the simpler renovations have the best return on their investment compared to the more complicated and expensive renovations.

Reduce Your Loan’s Term

If it makes sense to do so, you can refinance into a shorter term to increase your home’s equity. Refinancing itself won’t increase the equity, but the larger principal payments you’ll make will increase it. 15-year mortgage payments cover a larger portion of principal each month, which helps you increase the equity in your home faster.

We say only do this if it makes sense because it will cost you to refinance your loan. The lender and various third parties, such as the title company and appraiser will charge you fees. If you don’t plan to stay in the home until the term ends, it may not make sense to refinance. You’ll have to figure out what works for you.

For example, if it will cost you $6,000 to refinance your loan and you will only be there for another 3 years, you might not gain much more than $6,000 in equity, which would make the refinance an unnecessary expense.

Don’t Refinance Unnecessarily

If you aren’t refinancing to lower your loan’s term, you may want to avoid refinancing. Every time you refinance, you could reset the loan’s term. This gets you behind on your equity. If you refinance two or three times, that could be $10,000+ in closing costs. This takes away from the equity you build up in your home.

Rather than refinancing, you could use the pay extra money towards the principal trick to help you build up equity. Unless refinancing will save you a significant amount of money each month and you’ll pay off the closing costs quickly with the savings, it’s best to leave your loan alone.

Maximizing your home equity doesn’t have to seem impossible or overwhelming. With these simple steps, you can increase the value of your home and the return on your investment. Of course, always make sure that you never take more than you can afford. For example, if the 15-year loan payments won’t be easy to afford, keep your 30-year loan and just make extra payments when you can. You’ll get the same results without putting yourself in financial distress.

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