Whether you’re a current homeowner or a potential homebuyer, it’s likely you understand that building equity in a home can be a life game-changer — for you and your family.
Building equity in a property can significantly impact your financial future, including opening up more options for your next home purchase.
In this guide, we’ll explore what home equity is, why it’s important, and provide you with 10 solid strategies to increase your equity.
From making smart payment choices to enhancing your home’s value, these tips can help you maximize building equity and help you unlock the full potential of your investment.
How Much Is Your Home Worth Now?
Home values have rapidly increased in recent years. How much is your current home worth now? Get a ballpark estimate from HomeLight’s free Home Value Estimator.
What is home equity?
Home equity is the portion of your property that you actually own, calculated by subtracting any mortgage or loan balances from the current market value of your home. In other words, it’s the real financial stake you have in your property. As you pay down your mortgage and as the value of your property increases, your home equity grows.
This equity represents your home’s tangible value that can be converted into cash through selling, refinancing, or borrowing. It becomes a financial asset that can play a big role in your overall financial strategy, offering opportunities like funding home improvements, consolidating debt, or preparing for retirement.
Why is building home equity important?
Here are a few key reasons why building equity in your home matters:
- Financial security: Equity in your home contributes to your net worth, offering a cushion for financial emergencies or future investments. It can also be a powerful tool for debt consolidation.
- Wealth accumulation: Over time, as your equity grows, it becomes a significant part of your wealth, potentially aiding in long-term financial goals like retirement.
- Purchasing additional real estate: You can leverage the equity you’ve built in your home to secure a loan for an investment property, which serves as a powerful way to expand your real estate portfolio.
- Funding major expenses: With substantial home equity, you have the option to borrow against it, which can be useful for large expenses like home renovations or education.
- Profit potential: When selling your home, the more equity you have, the higher the profit you can potentially make, providing funds for your next home purchase or other needs.
10 ways for building equity in your home faster
1. Make a large down payment
The larger your down payment, the more immediate equity you have in your home. A substantial down payment reduces your loan amount, leading to quicker equity building as you pay off your mortgage. To help you plan your next home purchase, try HomeLight’s down payment calculator.
2. Refinance your loan to a shorter term
Refinancing to a shorter-term loan, like switching from a 30-year to a 15-year mortgage, can accelerate the rate at which you build equity, as more of your payment goes toward the principal balance.
3. Eliminate mortgage insurance
If you have conventional financing and have reached 20% equity, you can typically request to drop your private mortgage insurance (PMI), effectively reducing your monthly expenses and allowing you to build equity faster. Learn more about mortgage insurance at this consumerfinance.gov page.
4. Increase your home’s value
Enhancing your home through renovations or upgrades can significantly boost its market value, thereby increasing your equity. Focus on improvements that offer the best return on investment. (We’ll share the top ways to increase home value later in this post.)
5. Pay more than your minimum payment
Paying more than the required amount on your mortgage each month can shorten the loan term and build equity quicker. Even small additional payments can make a significant difference over time.
6. Consider switching to biweekly payments
Making biweekly mortgage payments instead of monthly can result in one extra payment per year, reducing your mortgage balance and increasing equity more rapidly.
7. Avoid rolling closing costs into your home loan
When refinancing, pay closing costs upfront rather than adding them to your loan balance. This prevents decreasing your equity and increases the rate at which you build it.
8. Stay in your home and let it appreciate
The longer you stay in your home, the more likely it is to appreciate in value, especially in a rising real estate market, as long as you keep up with regular maintenance. This natural appreciation boosts your equity over time. Building equity is why the 5-Year Rule is commonly cited in residential real estate planning.
9. Avoid borrowing money on your equity
While home equity loans can be tempting, using your equity as collateral can decrease the equity you have built up in your home. It’s great to have equity when you need it, especially in cases of emergency or opportunity, but weigh the benefits carefully. Be careful not to let your equity be chipped away for low-priority expenses.
10. If you do withdraw equity, reinvest in your property
If you decide to tap into your equity, consider using the funds for home improvements or other investments that could increase your home’s value, thereby replenishing and potentially increasing your equity.
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