5 Ways to Build Equity in Your New Home
What exactly is equity?
Equity is the value of your home minus the amount you still owe on your mortgage. It’s the amount of money you’d get if you were to sell your home today, but you can also usually borrow against your home’s equity if you’re in a pinch. You’ll have at least 5 percent equity on your home when you first buy it (from the down payment), but the more you can do to increase the equity, the better.
There are two ways to increase equity: by increasing the value of the home or by decreasing the amount you still owe on your mortgage. Since you’re purchasing a new home, there’s not a lot you’re going to be able to do to increase the value of the home for the first few years — though we’ll discuss some possibilities — but there’s plenty you can do to decrease your debt. You’ll be surprised by how big of a difference you can make by making small changes!
Learn more about the ways to build equity in your new home.
Encourage Others to Build in Your Community
If you needed to sell your new home after only a year, you’d probably break even or lose some money on it. After all, why would someone want to buy a lived-in, one-year-old home when they could purchase a brand new one built to their own specifications for the same price? However, once all of the lots in your community are full, people no longer have that option, and your home’s value can go up when that happens. If friends and family are thinking about buying a new home, recommend your community and your builder. Volunteer to do a testimonial for the builder. Sometimes, builders even have programs where you can earn a bonus for referring someone who buys a home.
Make Bi-Weekly Payments
Paying more money toward your mortgage is the key to reducing the balance. One way to do this is to make bi-weekly payments instead of monthly payments. To do this, you divide the monthly payment in half, then pay that amount to the mortgage company every other week on the same day. This is important. The payments need to be every other week, not twice a month. In doing this, you end up making 26 half-payments — or 13 full payments — over the year instead of just 12 payments. The extra money goes toward the principal balance. This method works particularly well for those who are paid on a two-week cycle.
Increase Your Monthly Payments
Another way to increase equity is to increase the amount of your monthly mortgage payment. In the first few years of making mortgage payments, a large amount of the payment goes towards the interest on the loan. Anything you give beyond the monthly payment goes directly to the principal balance. And this works out well because decreasing your principal balance decreases the amount of interest you pay. Even if you’re only able to pay an extra $100 a month, that money adds up to an extra $1,200 a year.
If you include an income suite on your property, you could have even more money that you could use to pay toward your mortgage, increasing your equity by a much larger amount.
Use “Windfall” Payments Toward the Mortgage
Throughout the year, you might get some larger payments, such as a tax return or a bonus from work. Rather than spending this money on a vacation or new car, you could instead use it toward the equity in your home by putting it toward the balance. That may not be as fun as some of the other options, but it’s the smarter move. If you’d prefer, use some of your windfall to treat yourself, but apply the rest to your mortgage.
Keep Up with Maintenance
Keeping up with the maintenance goes along with increasing the value of your home. You probably won’t sell your home for many years. You may not even be thinking of selling your home at all. But property maintenance is necessary to help the home retain its value.
Imagine you and your neighbour bought the homes at the same time, and you both decide to sell 10 years later. You’ve kept up with the maintenance, but the neighbour did not, so his home has scratched floors, stains in the carpet, and water damage to the roof. Which home would you want to buy? Which one would you spend more money on? The answer is clear.
Building up the equity in your home is a way to invest in yourself. As you look into your budget, try to make a few choices that will help you increase equity. Over time, your efforts could save you tens of thousands of dollars.