How to Build Equity in Your Home

Owning a home continues to provide real social and economic benefits and remains a high priority for most American families. In fact, homeownership is a main source of wealth among families in the United States. "How can my home be considered a source of wealth?" you may wonder. One of the easiest and most successful paths to wealth is by appreciating equity in your home.

Each month, when you make your mortgage payment, your loan balance is reduced, but the value of your home is likely the same or higher than before, so your equity has grown. Just by making payments, you are building wealth.

If you want your equity to grow more quickly, however, there are some additional steps you can take. Here's how:

• Make a more substantial down payment when you initially purchase your home. If you make a down payment of 20 percent or more, not only does that money automatically become equity, but you're likely to be offered a better interest rate and may avoid having to pay PMI insurance.
• Making extra payments toward the principal of your loan can also increase your equity, shorten the length of your loan and decrease the amount of interest that you will pay.
• Similarly, a shorter-term loan will allow you to pay off the principal of your loan faster and gain equity at a faster rate.
• Finally, many home improvement projects can add to the value of your home, which also increases your equity. The projects with the greatest return for your investment are typically kitchen and bathroom remodels or upgrading your home energy-efficiency; adding a swimming pool, however, may have the opposite effect and may not change the value of your home.