Key takeaways

Building home equity can not only be a reliable way to create wealth but can also help you maintain the home while you're living in it.

Building home equity generally involves increasing your property's value or decreasing your mortgage debt, or some combination of both.

Increases in home equity go hand in hand with increases in property values in general.

Home equity is a powerful asset -- and an essential component of homeownership. It represents the amount of your home you own free and clear instead of the amount you financed (and still owe). As you pay down your mortgage or your property value rises, your equity grows, making your home a more valuable asset.

Whether you are a new homeowner or have owned your home for years, it's crucial to understand how your equity stake grows, and how you can help it increase. Enhancing home equity helps you create a valuable asset over time, and appreciates your overall net worth.

Here's how to build equity in your home -- even before you buy it, and as you continue to live in it.

What is home equity?

Home equity is the portion of your home that you own outright. If you bought your home all in cash or have paid off your mortgage, you have a 100 percent equity stake in your home. Otherwise, your home equity is calculated by subtracting your mortgage balance from the home's current market value.

Say your home is worth $350,000 and you owe $150,000 on your mortgage. To determine your home equity, you would use the following calculation:

$350,000 - $150,000 = $200,000

If you're looking to take out a home equity loan or home equity line of credit (HELOC), it's good to know how much equity you have because lenders set borrowing amounts based on that equity. Generally, the more equity you have, the more money you can borrow.

Learn more:

How Much Home Equity Can You Borrow

$214,000

The approximate amount of tappable home equity the average U.S. mortgage-holding homeowner currently has, as of Q2 2024

Source:

ICE Mortgage Technology

Why building equity in your home is important

Building home equity is important for a few reasons. "It can be a reliable way to create wealth and help you maintain the home while living there," says Linda Bell, senior writer for Bankrate's Home Lending team.

Building equity in a property means:

You have a source of income. You can borrow against your home equity for nearly any purpose. The most common ways to do so are home equity loans and home equity lines of credit (HELOCs), generally available once you have a 15 to 20 percent equity stake. With a home equity loan, you receive all funds at once and immediately start paying the loan back over a period of up to 30 years. When you take out a HELOC, you have a draw period (often five to 10 years) when you can withdraw the cash you need when you need it and make interest-only payments. You then have a repayment period (typically 10 to 20 years) during which you pay back both interest and principal.

You are more likely to make a profit when you sell the home, even if you still have an outstanding loan balance. Building equity means you have a much better chance of selling the property for more than you owe on the mortgage, even if the market takes a (down) turn. You can use the profits from the sale to purchase another home or pay off other debt or invest it elsewhere.

You can build long-term wealth. Building home equity can help you increase your net worth over time, especially if you purchased your home when the market was in the buyers' favor. A home is one of the few types of collateral that has the potential to appreciate in value (cars, for example, depreciate over time). It also can furnish a source of wealth for your descendants.

How to build equity in your home

There are various ways to build equity in your home more quickly. The process generally involves increasing your property's value, decreasing your mortgage debt, or some combination of both. Below are a few options available to homeowners.

1. Make a big down payment

Building equity starts the moment you fork over your down payment. Remember: Home equity equals the amount of your home you own outright, and you own outright what you actually pay out of pocket for (as opposed to financing with a loan). So, the more cash you contribute towards the home purchase, the bigger your ownership stake.

Technically the percentage of the house you finance you don't own -- the bank does. While it may be possible to buy a house with as little as 3 percent or even zero percent down, a larger down payment instantly boosts your home equity.

When figuring your down payment though, consider how much savings you'll have remaining after closing. Leaving yourself with little to no cash reserves makes it harder to handle any financial emergencies that arise and can even make it more challenging to cover your regular monthly mortgage payment. You'll also need to account for home maintenance costs, which typically run about 1 percent of the home's value in the first year.

Avoid mortgage insurance

If you can put down at least 20 percent on the home purchase, you'll also avoid having to pay private mortgage insurance (PMI) each month. It's an additional surcharge built into your mortgage payment -- a burden you don't need. Avoiding having PMI (or MIP if it's a government-backed loan) added to your mortgage payment can free up funds each month and can help increase your home equity.

2. Get the cheapest loan possible

Maybe it's stating the obvious. Who doesn't want a less-expensive loan? But it plays a part in equity-building, too: The faster you can pay down the loan principal, the quicker your equity stake increases. So you want to pay as little in interest as possible. To that end, shop around for mortgages -- studies show that those who do are more likely to save money -- and for different types of mortgages, as some typically carry lower interest rates. Consider a mortgage with a term shorter than the traditional 30 years, for example: Not only is its interest rate lower, but you settle the debt sooner. You might consider an adjustable-rate mortgage, which also carries lower interest rates for several years. Just resist the temptation to make interest-only payments during that period.

3. Pay closing costs out of pocket

When you take out a mortgage, you may get an offer from your lender to roll any closing costs into the loan itself. Admittedly, it's tempting, as these up-front expenses can often amount to several thousand dollars -- as much as 5 percent of your loan. But, doing so adds to the monthly amount (the loan principal and the interest) you owe.

Paying closing costs and other upfront fees right away, if you can afford it, is a more economical move. It will help boost your equity because it means more of your dollars are going toward the loan principal, and it keeps the principal (and the amount of interest charged on it) smaller. This strategy applies to a mortgage, but it can also apply if you refinance your mortgage, which also incurs closing costs and fees.

4. Increase the property value

Home renovations can boost a property's value and, therefore, your equity. Just keep in mind that you likely won't recoup all the money you put into home projects. Some projects offer a better return on investment than others.

For example, according to Remodeling's 2024 Cost vs Value report, the average upscale bathroom remodel provides a just over 45 percent return on investment, while classic wood deck recoups nearly 83 percent of its cost. The project with the biggest bang-for-the-buck? Replace the garage door, which offers a whopping 194 percent return at resale.

Before taking on your next remodel, be sure to research first, or consult with a real estate agent or another home professional to get a sense of what improvements provide the most return. The goal is to avoid putting too much money into renovations that offer little to no increase in your home's value. An expert can help you sort through the options and select projects and even details -- finishes, features, appliances -- that provide the most reliable payoff for your efforts. Sometimes, less is more: While a minor kitchen remodel offers a 96 percent return on investment, a major remodel offers only 50 percent.

Regular maintenance also protects and increases the value of your home and, in turn, its equity.

"Taking care of small issues when they pop up can prevent them from turning into major, more expensive problems down the line," says Bell. "A cracked foundation or leaky roof can easily become a big headache. It's important to keep your property in good condition. Not only are you protecting its functionality while living in the home, but you are also enhancing its appeal to potential buyers when it's time to sell."

5. Pay more on your mortgage

Most mortgages are on an amortization schedule, meaning you make payments in installments over a set period of time until the loan is paid off. As you pay down the mortgage, your equity stake increases. While you'll always pay both principal and interest, a larger portion of the payment goes toward interest initially, and then more goes toward the principal over time.

However, if you make extra payments toward the principal every month, you build home equity quicker by decreasing the overall total owed on the debt. If you have the means to pay a little extra, call your loan servicer and ask how to do it. Check your monthly statements to make sure the extra money goes toward the principal.

Here are a few ways to pay your mortgage off faster:

Switch to biweekly mortgage payments. Split your mortgage payment in half and send each half every two weeks instead of once at the end of the month. This adds one extra payment to your mortgage every year, which can ultimately shorten your loan term and save you money on interest.

Add a certain amount each month. Check your budget to see how much extra you can realistically put toward your mortgage every month. For example, if you just paid off your car loan, consider putting that extra $250 toward the mortgage every month.

Use windfall funds. Any time you receive a tax refund, a bonus at work, or a cash gift, put it toward your mortgage balance.

6. Refinance to a shorter loan term

A shorter loan term has two main benefits: You typically get a lower interest rate, and more of your mortgage payment goes toward the principal each month. Choosing a 15-year mortgage from the start helps you build more equity every month than you would with a 30-year mortgage, because you're paying down the debt faster. If you already have a mortgage, you can refinance into a shorter-term loan.

However, there's a catch: Payments are higher on a shorter loan. Make sure there's room in your budget for that larger mortgage payment before you opt for the shorter term loan or refinance to one.

Also, because of their larger payments, shorter loans may be a tad tougher to get. To qualify, you'll need a bigger income, higher credit score and lower debt-to-income ratio than you generally would with the traditional 30-year mortgage.

7. Wait for your home value to rise

Local housing markets change over time, so your home's value might fluctuate. When property prices increase in your neighborhood and demand grows, the value of your home rises. Conversely, when home prices drop, your equity loses some of its worth.

While you don't have much control over real estate market fluctuations or economic conditions, you can protect yourself from economic shifts somewhat. Keep your home in good condition, always. Avoid tapping your equity too much or too often -- and when you do borrow against it, use the funds to enhance the home itself (with renovations like those described above) or to strengthen your finances (by paying off ongoing, high-interest debts).

You can check your home's value using an online price evaluator or by getting a professional appraisal. Bankrate offers an online home equity loan calculator to help you figure the worth of your equity stake.

Learn more:

How To Calculate Your Home Equity

8. Avoid a cash-out refi

If you're refinancing your mortgage, don't do a cash-out refinance. In a cash-out refi, you're replacing your old mortgage with a bigger one; the extra money you receive outright in cash (hence the name). This amount is based on the value of the equity you currently have in the home.

Basically, you're borrowing against your ownership stake -- which essentially reduces it. You're taking equity out of the house, in other words. Not good if your goal is to increase it.

A cash-out refi can be useful. But in this case, it's counterproductive. Stick to a rate-and-term refinance, which will potentially allow you to reap the rewards of a lower interest rate or a shorter-term mortgage while keeping your ownership stake intact.

Home affordability/Home equity insights

57% of prospective homebuyers say they're unsure whether it's a good time to buy right now, according to Bank of America's ( BAC ) 2024 Homebuyer Insights Report.

56% of non-homeowners say lack of sufficient income is keeping them from owning a home, according to Bankrate's Home Affordability Survey.

44% of aspiring homeowners are willing to downsize their living space to find more affordable housing, according to Bankrate's Home Affordability Survey and 34% are willing to move out of state or buy a fixer-upper.

68% of adults expect home prices in their local area to rise in the coming year, a Gallup survey found.

Homeowners held $11.5 trillion in tappable home equity in the first quarter of 2024, a record high.

Nearly half (49.2%) of mortgaged homes were considered equity-rich in the second quarter of 2024, meaning the homeowner's loan is less than half of the home's value.

Among current homeowners, 55% see home improvements or repairs as a good reason to tap home equity, according to Bankrate's Home Equity Insights Survey.

How home values will impact home equity in 2024

Home prices soared during the pandemic, fueled by intense demand and record-low interest rates. But those rates began to rise rapidly in 2022, doubling and even tripling from their previous troughs. Despite the highest rates in the past two decades, however, home prices have continued their upward climb in 2024. The median sale price of an existing home in the U.S. hit an all-time-high of $426,900 in June, and August's median of $416,700 was only slightly lower, according to the National Association of Realtors (NAR).

That's bad news for homebuyers -- but happy tidings for homeowners. As home prices have climbed, so has the worth of Americans' home equity. According to CoreLogic's Homeowner Equity Insights, U.S. homeowners with mortgages have seen their equity increase by a collective total of $1.5 trillion since the first quarter of 2023, a gain of 9.6 percent year over year.

As to the rest of the year: Who can say? The Federal Reserve, whose monetary policy indirectly affects mortgage rates, has finally started cutting interest rates. That might ease the home-affordability squeeze, but don't expect a dramatic uptick in the amount of housing available for sale. Many existing homeowners will still be unwilling to put their homes on the market and lose the low interest rates they locked in in days of yore to buy a new place.

Given this tight inventory, it's not likely that values will decline substantially, if at all. Home prices will stay relatively high, residential real estate will continue to appreciate -- and so will homeowners' equity stakes.

Bottom line on building and using home equity

Many homeowners nowadays are borrowing against their equity to get cash. Among current homeowners, 55 percent see home improvements or repairs as a good reason to tap home equity, according to Bankrate's Home Equity Insights Survey. Nearly one-third (30 percent) cite debt consolidation -- paying off credit cards or other high-interest obligations.

"Home equity loan rates and HELOC rates are attractive because they tend to be lower than you would find with a personal loan or credit card," says Bell.

However, "to get those lower rates, you are putting your home on the line as collateral," she notes. "Ensure you can take on the additional debt load because you can lose your home if you can't keep up with payments.

"Also, if home values fall after you've tapped your equity, you could go from equity rich to negative equity in a heartbeat and owe more than your property is worth.

Overall, "it's important to weigh the pros and cons of accessing your home equity before moving forward," Bell says. Also, be sure to evaluate how quickly you can rebuild your equity. Because, whether it's buoyed by a hot market or by paying off a mortgage -- or both -- a rich equity stake benefits a homeowner in a variety of ways, both long-term and for immediate aims.