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How to Build Equity in Your Home
By Aly J. Yale MONEY RESEARCH COLLECTIVE
The more home equity you have, the more profit you’ll enjoy when you sell the property. You can also turn equity into cash for things like home repairs, paying off debts or covering virtually any expense you might be facing.
Do you own a home? Here’s how to build up your equity — and why you’ll want to do it.
Table of contents
- What is equity in a home?
- 5 Steps to build equity in a home
- Benefits of building equity in a home
- How to build equity in a home FAQs
- Summary of our guide on how to build equity in a home
What is equity in a home?
At its simplest, home equity is the portion of your home you actually own. To calculate it, you take the current market value of your home and subtract any mortgage balances you have on the property.
So, for example, if your home is worth $450,000 and you have $210,000 on your mortgage loan, you’d have $240,000 in home equity (450,000 – 210,000).
Equity directly translates to profits when you sell your house. While you’re still in the home, you can use products like cash-out refinances, home equity loans and home equity lines of credit (HELOCs) to turn your equity into cash.
5 Steps to build equity in a home
If you own a home, building equity should be a top priority. Here’s how to build home equity in five simple steps.
Step 1: Buy in a smart location
When your home rises in value, your equity increases, too. To ensure your property’s value grows over time, be choosy about where you buy your house.
Work with an experienced real estate agent, and consider factors like the quality of schools, amenities, up-and-coming developments in the area and other details that may increase demand for housing in the neighborhood.
You should also think about the local employment market. Are jobs increasing in the area? Are more companies moving to the region? This would likely mean more potential homebuyers — and higher home values — down the line.
Step 2: Make a big down payment
Your down payment essentially represents instant equity, so if you put down 20%, you’ll have 20% equity as soon as you close on your home. (You’ll also avoid private mortgage insurance.) If you put down just the minimum — anywhere from zero to 3%, depending on your loan type — you’ll have much less equity, at least at the start.
If you can, always try to make more than the minimum down payment. Just be careful that it doesn’t drain your savings. You’ll want enough on hand to cover at least a few months of mortgage payments should you lose your job or experience some other financial hardship.
Step 3: Pay down your mortgage
As you pay down your mortgage balance, your equity stake increases, so stay on track with your mortgage payments — and try to put extra money toward the loan when you can.
This might mean putting your annual tax refund or holiday bonus toward your loan or even just adding an extra $100 to your monthly mortgage payment. That extra amount will go straight toward your mortgage’s principal balance, which increases your equity and reduces your long-term interest costs.
You can also commit to making bi-weekly payments instead of monthly ones. Just split your monthly payment in two, and set up autopayments in that amount every two weeks. This ends up adding a full extra payment to your loan by the end of the year (26 bi-weekly payments vs. 12 monthly!)
Step 4: Improve your property
If you’ve chosen a good location, your home should increase in value gradually over time, and thus, your equity will increase, too.
If you want a more instant value boost, you can improve your home — renovate it, add to it or even just make much-needed repairs. Keep in mind, though: Not all home upgrades are created equal. Check out Remodeling Magazine’s Cost vs. Value report to get a feel for which projects deliver the most value (and which don’t).
Step 5: Refinance when it makes sense
Refinancing can be a good way to build equity. If you can, refinance into a new mortgage with a lower rate and payment, but keep making your old, higher payments instead. This keeps your monthly costs the same but allows you to pay down the principal balance (and build equity) faster.
You can also refinance into a shorter loan term — from a 30-year mortgage to a 15-year mortgage, for example. This helps you pay down the loan faster (though it will come with higher payments and you may also have to cover closing costs).
Benefits of building equity in a home
When you build equity, you increase your eventual profits from the house. It’s why homeownership is considered a wealth-builder, and why many people use their homes as their “nest egg,” which they cash in on in retirement.
Home equity can also serve as an affordable financing option. If you need funds for something, you can use a cash-out refinance, home equity loan or HELOC to tap your home equity and turn it into cash. This is often a better option than using credit cards, personal loans and other financial products since mortgage loans (second mortgages included) tend to have much lower interest rates.
How to Build Equity in a Home FAQs
Why does building equity in a home matter?
Your home is an investment, and equity plays a direct role in how profitable that investment is in the long run. If you build equity over time, you increase your eventual returns and have made a profitable investment. If you fail to build equity, your investment won't be profitable, or it may even result in a financial loss.
How long does it take to build equity on a house?
You get instant equity when you make a down payment on your house, and again, every time you make a mortgage payment. If your housing market is strong and home prices in your area start to rise, you'll also see your equity stake rise, though this may take a few years.
How is equity built in a home?
Home equity is built in two ways: First, by reducing your mortgage balance and increasing the portion of the home you actually own. And second, by increasing your home's value. The latter might happen naturally, as demand for homes in your area rises, or by improving your home with smart renovations and updates.
What does it mean to build home equity?
If you've built up equity in your home, it means you'll make a profit when you sell the property. It also means you have something to leverage if you need cash down the line. Cash-out refinancing, home equity loans and HELOCs are all ways to access your home equity. (If you're considering tapping your home equity, use our best home equity loan guide to find a lender).
What is the quickest way to build equity in your home?
The most rapid way of building home equity is making a large down payment. Making extra payments toward your home loan is another instant way to increase the amount of equity you have.
Summary of our guide on how to build equity in a home
Equity is your key to building wealth as a homeowner, and while some equity is built naturally, as your home’s market value improves, there are steps you can take to directly increase your equity too.
Make a solid down payment, stay on track with your mortgage payments and consider putting extra toward your loan when possible. You can also plan some home improvement projects, like adding a deck or boosting the property’s curb appeal through landscaping, to improve your home’s value and increase your equity.
If you choose to tap your home equity with a cash-out refinance, HELOC or home equity loan, make sure to shop around for your lender. Rates, terms and fees can all vary widely by company, so compare at least a few options to ensure you get the best deal.
