How to Build Equity in Your Home
If you're a homeowner, you may be wondering how you can build equity in your home. Below, we cover how you can build your equity, how long it may take and how you can leverage your equity.
What Is Home Equity?
Home equity is the difference between the current market value of your home and the outstanding balance on your mortgage or any other loans your home secures.
How Does Home Equity Work?
You can calculate your home equity by subtracting your mortgage's remaining balance from your home's value. For example, if you still have $300,000 remaining on your mortgage and your home is currently worth $750,000, your home equity would be $450,000.
Home equity can increase over time as you pay down your mortgage or as your home increases in value. On the other hand, your home equity can decrease if you take out additional loans against your home or if the value of your home decreases. Home equity is an important financial asset you can use in a variety of ways, such as borrowing against it or selling your home for a profit.
How Long Does It Take to Build Equity?
It typically takes time to build home equity, and the process is gradual. How quickly you can build it depends on several factors, including:
- The size of your mortgage.
- The interest rate on your mortgage.
- The term on your mortgage.
- Changes in the local real estate market.
If you have a fixed-rate mortgage, most of your early payments will go toward interest rather than principal, so you'll be building home equity more slowly early on. However, as you pay down your mortgage balance, more of your payments will go toward the principal, allowing you to build equity more quickly.
Ways to Build Home Equity
In addition to making regular mortgage payments, there are a number of other ways to help you build home equity, such as:
- Paying down your mortgage: One of the simplest ways to increase your home equity is to make extra mortgage payments or higher monthly payments — the more you pay it down, the larger the difference between your home's value and your debt. You'll also be able to pay off your mortgage faster while increasing your home equity.
- Making home improvements: Making improvements to your home can increase its value, which in turn can increase your home equity. Some improvements likely to add value include kitchen and bathroom renovations, adding a deck or patio or updating flooring and fixtures.
- Making a larger down payment: If you're in the process of buying a home, making a larger down payment lets you start off with more home equity. It can also help you avoid paying private mortgage insurance (PMI), which can make your monthly payment higher.
- Refinancing to a shorter-term loan: Refinancing to a shorter-term loan, such as a 15-year mortgage, can help you pay off your mortgage faster and build equity more quickly.
- Keeping up with regular maintenance: Keeping your home well-maintained can help maintain or increase your property's value over time. Regular maintenance includes painting and resurfacing driveways, promptly repairing any damage and keeping up with landscaping.
If you take these steps, you can build home equity more quickly. Building home equity tends to be a long-term process that requires consistent effort and patience. Keep in mind that outside forces like changes in the real estate market can also affect your home equity, so it's not entirely within your control. However, taking steps to maintain and improve your home can help increase your chances of building equity over time.
How to Use Your Home Equity
There are several ways in which you may be able to make use of your home equity, such as:
- Home equity loan: Securing a home equity loan enables you to borrow money against the equity in your home. This type of loan typically has a fixed repayment term and fixed interest rate. A home equity loan can be a good option if you need a lump sum of cash for a specific purpose, such as a home renovation project or paying off high-interest debt.
- Home equity line of credit: A home equity line of credit (HELOC) is a line of credit that lets you borrow money against the equity in your home. Unlike a home equity loan, a HELOC typically has a variable interest rate and a draw period during which you can access the funds. A HELOC can be a good option if you need ongoing access to funds over a longer period
- Cash-out refinance: A cash-out refinance gives you a lump sum to first payoff your existing mortgage(s). . You can use the remaining amount for any purpose, such as home improvements or paying off debt. This option can be a good choice if you need a large amount of cash or want to take advantage of lower interest rates.
Consider your options carefully and consult with a financial advisor before deciding how to leverage your home equity.
Explore Our Home Equity Options
At First Commonwealth Bank, we aim to improve our customers' financial lives. We offer the one-on-one communications and personalization of a small bank while still providing you with the financial services of a large bank, including the following:
- Personal banking
- Commercial banking
- Small business banking
- Trust and estate planning
Our mission is to improve your financial life. Though our headquarters is based in Indiana, Pennsylvania, our footprint includes locations in Western, Eastern and Central Pennsylvania and Northern, Central and Southern Ohio. Contact us to learn more about our home equity options today, including a home equity loan or line of credit.
Explore Our Home Equity Options
We offer the one-on-one communications and personalization of a small bank while still providing you with the financial services of a large bank.