How to build equity in your home: A guide

Quick insights

• Home equity is the difference between the fair market value and how much you still owe on your mortgage. You can increase it by paying off your mortgage or making improvements to your home.
• A few ways you can build equity include making extra mortgage payments, enhancing your property and boosting rental income.
• Building home equity is critical because it gives you more control over your assets, allows you to borrow against your equity if absolutely necessary and increases your potential profits when selling your home.

Building equity in your home is an exciting part of homeownership. Building equity means increasing the percentage of an asset you own — in this case, the percentage of your home compared to how much you still owe on your mortgage. Paying off your mortgage is a natural way of building equity, but you may be wondering if there are ways to expedite this process. Let’s take a look.

What is home equity?

Home equity is the amount of home you own compared to how much you borrowed. The down payment is the first major contribution toward your home equity. The bigger the down payment, the more home equity you start off with. As you pay off your mortgage, you progressively owe less money and own more of your home (equity).

What does it mean to build equity?

Building equity is all about increasing the value of an asset over time, which means you own more of it as its worth grows. For example, in real estate, equity is the difference between what your property is worth and what you still owe on your mortgage.

How to calculate your home equity

You may calculate home equity by subtracting the outstanding balance of your mortgage from the appraised value of your home. For example, if your home’s appraised value is $400,000 and your outstanding mortgage balance is $100,000, then your home equity would be $300,000.

Why is building home equity important?

Building home equity is considered important for a few reasons. Typically, when you buy a home, one of the goals may be to own the asset and let it appreciate over time before eventually selling it for profit.

Here are a few other reasons why home equity is considered an essential aspect of homeownership:

• Home equity loans allow you to borrow against your equity: Home equity loans allow you to borrow against your home equity by taking out a loan, using your property as collateral to secure the loan. You may use this loan to cover other expenses, make home improvements, invest in another home or use it in the event of an emergency. If you’re able to borrow against your equity, having this leverage may prove useful someday. Note: Chase does not offer home equity loans.
• The more equity you have, the more you may profit from selling your home: If you’ve paid off your entire mortgage before you sell your home, you’ll get to keep all potential profits from the sale. In many cases, however, sellers may not have paid off their entire mortgage and are required to do so upon the sale of their home. If you still owe money on your mortgage, this will affect how much you profit from the sale. Generally speaking, the more home equity you have, the greater your profit will be.
• The opportunity to use your home equity to decrease your debts and improve your creditworthiness: Cashing in on your home equity may be used to pay off other debts. By paying off other debts, you’re decreasing your debt-to-income ratio and ultimately, improving both your financial health and creditworthiness.

How to build equity in a home

In the previous section, we covered a few ways to build equity. Here’s an expanded look at how to build equity in a home with real-life examples:

Make regular mortgage payments

Making regular mortgage payments is the foundation of building equity in your home. Each payment reduces your outstanding loan balance, gradually increasing your ownership stake in the property. For example, if you have a $300,000 mortgage and make consistent monthly payments, you’ll slowly chip away at the principal amount. Initially, a large portion goes toward interest, but over time, more of your payment will apply to the principal, increasing your equity.

Make early or extra mortgage payments

One effective strategy to build equity faster is to make extra mortgage payments. By paying more than your required monthly amount—whether it’s a little extra each month or a lump sum—you reduce your principal balance more quickly. For example, if your monthly payment is $1,500, adding an extra $100 each month can significantly shorten the life of your loan and decrease the amount of interest paid over time. Even a one-time payment of $4,000 toward the principal can save you thousands in interest and years off your loan term.

Sweat equity

Sweat equity involves investing your time, effort and even labor into improving your property, potentially increasing its value without major financial outlay. This could include tasks like painting, landscaping or even more extensive renovations like remodeling a kitchen or bathroom. For instance, if you spend weekends renovating your basement into a livable space, you could add considerable value to your home. Not only could this improve your living situation, but it can also lead to a higher appraisal when you decide to sell or refinance, therefore increasing your equity.

Home improvements

Making strategic home improvements is another way to build equity. Projects that enhance your home’s functionality and appeal, such as updating your kitchen or living room, could yield a strong return on investment. For example, a kitchen remodel might cost you $10,000 but increase your home’s value more than that. It might be a good idea to focus on upgrades that align with current market trends and neighborhood standards.

Make a sizable down payment

Putting down a larger initial payment when purchasing your home can significantly boost your equity from the start. For example, if you buy a $400,000 home with a 20% down payment of $80,000, you immediately have $80,000 in equity. This not only lowers your mortgage balance but can also help you avoid private mortgage insurance (PMI), making your monthly payments more manageable and your investment more solid.

Avoid or get rid of your mortgage insurance

Mortgage insurance is often required when your down payment is less than 20% of the home’s value. This insurance protects the lender, but it adds to your monthly costs without building equity. By making a larger down payment or refinancingec-refinance-hl000061 once you have at least 20% equity, you can eliminate this expense. For instance, if you have a $200,000 loan with $150/month in PMI, eliminating that cost increases your monthly cash flow, allowing you to allocate those funds toward paying down the principal faster.

Pay closing costs out of pocket

Covering closing costs upfront rather than rolling them into your mortgage can also help you build equity more quickly. Closing costs often amount to thousands of dollars, and if they are included in your mortgage loan, you end up paying interest on those costs over the life of the loan. For example, if closing costs are $5,000 and you finance them, you’re essentially paying interest on that amount for 30 years. By paying your closing costs out of pocket, your loan balance will remain lower from the start, accelerating your equity growth.

Refinance on a shorter loan term

Refinancing your mortgage to a shorter loan term, from a 30-year fixed mortgage to a 15-year fixed mortgage, could help you build equity more quickly. While your monthly payments may be higher, the principal is paid down faster, meaning you build equity at an accelerated rate. For example, if you refinance a $300,000 mortgage to a 15-year term, you could pay it off in half the time while saving on interest over the life of the loan.

Avoid a cash-out refinance

While cash-out refinancing can provide immediate cash, it could also extend the life of your loan and increase your mortgage balance. As a result, it can reduce your equity in your home. Instead of tapping into your home’s equity for expenses, you may want to consider other financing options. For example, if you cash out $50,000 from your $300,000 mortgage, you could end up with a new loan of $350,000, virtually losing equity instead of building it.

Wait for the value of your home to appreciate

Patience can be a valuable asset in building equity. Over time and depending on various factors, homes generally appreciate in value, especially in a strong market. By holding onto your property, you allow for natural appreciation to work in your favor. For example, if your home is worth $300,000 today and appreciates at a rate of 3% per year, in five years, it could be worth approximately $348,000. This increase not only adds to your equity but also enhances your financial position if you choose to sell or refinance later.

In summary

Building home equity is the concept of paying off your mortgage and gradually owning more and more of your home. Building home equity is desirable because you’re increasing your control and ownership over your asset, which provides you with opportunities for financial flexibility like using your home equity to improve your home, cover debts or make a profit when you sell your home. Consider speaking with a home lending advisor to decide what benefits you may get out of tapping into your home equity.

FAQs About Building Home Equity

This FAQ section addresses common questions about building home equity, offering additional insight into strategies and benefits for homeowners.

How long does it take to build equity in your home?

On average, homeowners may see significant equity buildup within 5-10 years, especially if property values in the area are rising. Building equity in your home depends on numerous factors, including the property’s appreciation, your mortgage payments and any additional payments you make.

Does refinancing affect home equity?

Yes, refinancing can affect your home equity in a few ways. If you refinance for a larger loan (cash-out refinance), you might reduce your equity because you’re borrowing against it. If you change the loan terms (i.e., shortening the repayment period like going from a 30-year mortgage to a 15-year mortgage), this could affect how quickly you build equity.

What types of home improvements add the most equity?

Here are the types of home improvements that tend to add the most equity: kitchen remodel, bathroom remodel, curb appeal enhancements, adding square footage and energy-efficient upgrades.