How to Build Home Equity

How to Calculate Your Home Equity

Calculating home equity is relatively easy. Here's a step-by-step guide:

1. Figure out how much your home is worth. You can do this by getting a home appraisal or looking up estimates on sites like Realtor.com or Zillow.
2. Check your mortgage balance. This is how much you currently owe on your home loan, which includes second mortgages like home equity loans or lines of credit.
3. Determine the dollar amount of your equity. You do this by subtracting your mortgage debt from your property value.
4. Convert that into a percentage. Divide your home equity amount by your property value, then multiply the result by 100.

Example: Let's say your home is valued at $430,000, and you owe $200,000 on your mortgage. That would give you $230,000—or 53%—in equity.

• $230,000 / $430,000 = 0.53
• 0.53 x 100 = 53% equity

Learn more: How to Calculate Home Equity

How to Build Home Equity

There are several ways to build home equity and bump up your ownership stake. That might involve reducing your mortgage balance or increasing the value of your home.

1. Make Extra Payments Toward Your Principal

Paying off your mortgage early means that you'll pay less interest over the life of the loan. Until then, every extra payment you make will increase your equity position. You can do this by:

• Increasing your monthly mortgage payment: Check with your mortgage servicer first to ensure that those extra funds will go toward your principal balance (instead of interest or your next payment).
• Making biweekly payments: Rather than making one full monthly payment, you'll pay half that amount every two weeks. This will result in one extra mortgage payment per year, which can help you build equity at a faster clip. Just make sure your lender accepts biweekly payments before submitting them.
• Taking advantage of cash windfalls: This can include everything from tax refunds to work bonuses to inheritances. Again, you'll want to put these one-off extra payments toward your principal balance.

Learn more: Why Paying Your Mortgage Biweekly Can Save You Money

2. Pay Closing Costs Upfront

Closing costs, which generally range anywhere from 2% to 5% of the home sale price, go hand in hand with getting a mortgage. They typically include a combination of:

• Lender fees
• Fees from third-party service providers like title search companies
• Prepayments to cover property taxes and homeowners insurance premiums

When buying your home, you may have the option to roll these costs into your mortgage. This could significantly reduce your upfront expenses, but it means that you'll owe interest on your closing costs. You'll also have a larger loan amount—making it harder to chip away at your principal balance and build equity in your home.

Learn more: Can You Negotiate Closing Costs?

3. Remove Private Mortgage Insurance

If you get a conventional mortgage with a down payment that's less than 20%, you can expect to pay private mortgage insurance (PMI). This is meant to protect the lender if you default on your mortgage. Your PMI premium will likely be added to your monthly mortgage payment and held in an escrow account. The mortgage servicer will draw on that account to pay your premiums on your behalf.

Your PMI should automatically be canceled when you acquire 22% equity in your home, but you can request an early cancellation when you reach the 20% mark. You might be there if your property value has increased since you purchased the home.

Your mortgage lender may require a home appraisal before approving your request to remove PMI. If it's granted, you could put more money toward your principal balance to build equity faster.

4. Invest in Home Improvements

Updating your home could increase your property value—and your equity position. Below are some home improvement projects that tend to offer a higher return on investment, according to the 2024 Cost vs. Value Report published by data and consulting firm Zonda:

Source: Zonda

Tip: You'll want to consider whether home improvement costs are worth the home equity. For example, a minor kitchen remodel could cost upwards of $27,400. When weighing the possibility of a given home improvement, it's wise to think in terms of both return on investment and what realistically fits into your budget.

Learn more: Home Improvements That Add the Most Value

5. Refinance Your Mortgage

You might secure a lower interest rate by refinancing your mortgage. This requires taking out a new home loan and covering closing costs, but that may be worth the long-term savings. A lower rate should reduce your monthly payment, freeing up more cash to put toward your principal balance.

You can also refinance from a 30-year mortgage to a 15-year mortgage. This would result in a larger monthly payment, but you'll build equity—and pay off your loan—faster. You'll also pay less interest in the long run.

Mortgage calculator

Learn more: How Does Refinancing a Mortgage Work?

6. Avoid Borrowing Against Your Equity

One of the biggest perks of home equity is that it offers financial flexibility. You can tap your equity through a loan or line of credit to cover all sorts of expenses—whether that's job loss, a medical emergency, college expenses or home renovations. You'll then be responsible for repaying what you borrow, with interest.

One downside is that borrowing against your equity will reduce your ownership stake. Your home will also be used as collateral to secure the debt. In other words, you could face foreclosure if you default on your payments.

Learn more: Reasons Not to Tap Into Home Equity

Why It's Important to Build Home Equity

No matter how you go about it, owning a larger percentage of your home's value can help strengthen your financial health. Here are some key advantages to having equity in your home:

• It increases your net worth. If you cashed out all your assets, including your home, and paid off all your debts, your net worth is what would be left over. The higher your home equity, the more you stand to profit when you sell your home.
• It can supercharge your borrowing power. Lenders typically allow you to borrow anywhere from 75% to 85% of your home equity. To qualify for a home equity loan or line of credit, you'll need 15% to 20% equity, good credit, a strong payment history and solid income.
• You can receive better loan terms. Home equity loans and lines of credit typically have lower interest rates than credit cards and personal loans. That can make it more affordable to borrow money.

The Bottom Line

The ability to build equity is one of the many benefits of owning a home. If you maintain your property and keep up with repairs, there's a good chance your home value will increase over time. That means your home may very well be your most valuable asset.

You can also borrow against your home equity if necessary, but you'll likely need a credit score of 680 or higher. You can start by checking your FICO^® Score^☉ and credit report for free from Experian.