Home equity is how much of your home you actually own. In other words, it’s the market value of your home, minus the amount you owe on your mortgage. For example, the equity on a $500,000 house with a $300,000 mortgage is $200,000.
Building equity is crucial because your home is an asset that can be used to finance other areas of your life. It also brings you closer to owning your home outright.
Every time you make a payment, your home equity increases. You can also boost your home equity by adding to the value of your home, as with making home improvements.
The key to building equity is to pay down your mortgage while reinvesting in your house. This allows you to increase your home value, your total equity, and the overall value of your holdings.
Here are five savvy ways to build home equity.
1. Make a Big Down Payment
The fastest way to build home equity is to make a large down payment. The minimum down payment in Canada is 5%, but homeowners who put down less than 20% must pay for mortgage default insurance or CMHC insurance.
CMHC insurance payments range from 2.65% to 5% of your mortgage principal, depending on the down payment. This added expense will eat into your income and reduce your ability to invest in home equity.
In Calgary, the average down payment is around 10% due to the high number of first-time homeowners. Better to buy a home that’s a bit cheaper, increase the down payment, and build equity in your home faster.
2. Improve the Property
Renovating or remodelling will increase your home equity. Ideally, you want to invest in home improvements that sustain their appeal over the lifetime of the home.
For example, installing a wooden deck will net you around 82 cents per dollar spent and boost the curb appeal of your home. By adding desirable features or making aesthetic upgrades, you can better recoup your investment and make it easier to sell your home in the future.
Home improvements are a common path to home equity for Canadians homeowners as one-third of the $41 billion in home equity lines of credit go to remodelling or renovations.
3. Pay More Into Your Mortgage
Making a larger monthly mortgage payment will reduce your total debt and thereby increase your home equity. The amount must be applied to the mortgage principal, so ask your mortgage agent for help.
You can increase your payments in various ways, such as:
- Switch to biweekly payments to double your total yearly payment
- Increase the monthly payment by one-twelfth to add one monthly payment per year
- Add a lump sum that you can afford to your monthly payment to improve your mortgage timeline
You can use a mortgage amortization calculator to plan the mortgage payments that work best for you.
4. Refinance Your Mortgage
Typically, the period of a home loan is 30 years. Refinancing to a 15-year mortgage will effectively double your monthly payments, but it will skyrocket your home equity. Refinancing is the high-savings, low-risk way to approach a mortgage.
When you refinance, you secure a lower interest rate on your home loan. Shaving off percentage points can save you thousands of dollars over the loan period. And because you’ll be paying on the loan for fewer years, you’ll spend less in total interest.
Unfortunately, mortgage refinancing isn’t guaranteed. To qualify, banks want you to have a good credit score, a low debt-to-income ratio, and a fair amount of preexisting home equity.
5. Wait for Your Home to Increase in Value
The value of homes in the real estate market is increasing. As the population grows and cities expand, there’s a greater need for homes.
If you’re keen to play the long game, make home upkeep a priority. Routine maintenance is unexciting, but it’s a low-cost way to sustain the value of your home. Conversely, if your home is deteriorating, you’ll end up losing home equity in the long run.
Adding to your home equity is a gradual process for most homeowners. It requires a savvy eye for finance, plus the willingness and energy to complete any home upgrades. Which of these ways will you be adopting?