How to Maximize the Equity in a Home

For the average person, your home may be your biggest single investment and one of your largest opportunities to gain wealth. Your home equity can be tapped in retirement, either through reverse mortgages or through the sale of your home. It makes sense to maximize the equity in your home in case you wish to sell and move up to a bigger home, as it will give you more money to put down on your next mortgage. Most of what is required to maximize home equity is discipline to follow through with good financial decisions.

Step 1

Increase the value of your home through well-thought-out improvements. By increasing the value of your home, you also increase its equity. Many improvements are not expensive to complete, such as painting interior or exterior walls or replacing aged flooring; however, the visual appeal enhances the value considerably. Simple kitchen and bathroom renovations can also increase the value of your home considerably with minimal investment, as these are some of the first rooms that buyers look at.

Step 2

Pay extra on your home mortgage every month and reduce the outstanding balance more quickly. Any amount that you send in each month to be applied strictly to the principal of the loan will lower the total debt, reduce the interest charges in future months and increase your equity. You can round up to the nearest $100 on your payment, or you can pay the principal amount due with your next payment from an amortization schedule on your loan.

Step 3

Refinance your home mortgage to a shorter-term loan. The 30-year mortgage is common but by dropping your term to a 15-year loan, you can build equity much more quickly. With a $300,000, 30-year mortgage at 3.75 percent, or a 15-year mortgage at 3 percent, you will pay $683 more per month with the 15-year mortgage. At the end of five years, you will have $55,679 more in equity with this loan than if you chose the 30-year mortgage.

Tip

  • Monitor your home equity on a regular basis. Keep track of the approximate value of your home, as well as the balance on your primary mortgage. By tracking these numbers, you may be more likely to make extra payments as you are able and see the effects on your principal balance immediately.

Warning

  • Avoid taking out a home equity loan or cash-out refinance to use the money for consumer items or consumables like vacations. These items depreciate in value quickly, or have no value once used, but can seriously compromise how quickly you build home equity.

Photo Credits

  • BananaStock/BananaStock/Getty Images

About the Author

Craig Woodman began writing professionally in 2007. Woodman's articles have been published in "Professional Distributor" magazine and in various online publications. He has written extensively on automotive issues, business, personal finance and recreational vehicles. Woodman is pursuing a Bachelor of Science in finance through online education.

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