Increasing Your Equity

Regardless of whether you're considering a home equity loan, it's always a good idea to improve the equity in your home because high equity means more money in your pocket when it's time to sell. There are several ways to accomplish this:

Paying Faster is Paying Wiser

Although most lenders are happy to offer 30- and 40-year mortgages, they consider them to be riskier than short-term models because there's more time for the borrower to default on the loan. For that reason, they generally like to take a good portion of their service fees--added to the principal amount of the loan as interest--early on. So while long-term loans usually mean lower monthly payments for the borrower, less of that money, especially during the first few years, actually goes toward paying down the principal--or the amount that was originally borrowed.

On the other hand, because less time passes before they get their money back, lenders more evenly spread out interest costs over the life of a 15-year loan. Therefore, a person who's been paying for five years on a 15-year loan will likely have more equity than someone who's been paying for the same amount of time on a 30-year loan.

Up the Ante

While an equity-accruing short-term loan might look good on paper, the truth of the matter is such a loan isn't always practical because many people can't afford its higher monthly rates. If you fall into this majority, don't panic. It doesn't necessarily mean you're destined to live in low-equity squalor.

Every dollar you hand over in addition to your required monthly payment is applied directly toward the principal. The adage "every little bit helps" couldn't be truer in this case, as paying down your principal faster not only increases equity faster, but also it reduces the total amount of interest you'll pay and shortens the life of the loan.

Pump Up the Product

Simply put, improving your home improves your home's worth. While turning your screened-in patio into a den or knocking out an outside wall to create a gourmet kitchen will certainly boost your home's market value, the improvements needn't be so extravagant. A fresh coat of paint could give your rooms a fresh, brighter appearance and score points with the appraiser. Replacing outdated, bulky light fixtures with sleek, modern adornments can do wonders for a home's appearance. Repairing cracks in your walkway or porch, or planting trees or shrubbery can vastly improve a home's curb appeal. And replacing worn out or stained carpeting with a bright, soft plush can make an older home feel new again.