what-is-home-equity): What It Is and How to Build It

Home equity is one of the most powerful wealth-building tools available to homeowners. Yet many people don't fully understand what it is or how to maximize it. If you're wondering how equity works and how to build it faster, this guide breaks down everything you need to know.

What Is Home Equity?

Home equity is the portion of your home that you actually own—the difference between your home's current market value and what you still owe on your mortgage.

The simple formula:

Home Equity = Current Home Value - Outstanding Mortgage Balance

For example, if your home is worth $500,000 and you owe $350,000 on your mortgage, you have $150,000 in equity. That's 30% equity in your home.

Why Home Equity Matters

Home equity represents real wealth. Unlike stocks or other investments, it's tied to a tangible asset you use every day. Here's why it's important:

1. Net Worth Growth

Equity is a major component of net worth for most Americans. According to the Federal Reserve, home equity accounts for nearly 70% of the average homeowner's wealth.

2. Financial Flexibility

You can borrow against your equity through home equity loans, HELOCs, or cash-out refinancing for major expenses like home improvements, education, or debt consolidation.

3. Lower Borrowing Costs

More equity means lower loan-to-value (LTV) ratios, which translates to better interest rates when refinancing and the ability to eliminate [private mortgage insurance](/blog/mortgage-insurance-pmi-guide) (PMI).

4. Retirement Security

Many retirees use equity as a source of funds through reverse mortgages or by downsizing to a less expensive home and pocketing the difference.

[How Home Equity Grows](/blog/how-home-equity-grows)

Your equity increases in two primary ways:

1. Paying Down Your Mortgage

Every mortgage payment includes [principal and interest](/blog/amortization-schedule-guide). The principal portion directly reduces your loan balance, increasing your equity. In the early years of a 30-year mortgage, most of your payment goes to interest. But over time, more goes toward principal.

Example amortization breakdown for a $400,000 loan at 6.5%:

Year 1: ~$8,100 toward principal, ~$25,500 toward interest
Year 10: ~$12,000 toward principal, ~$21,600 toward interest
Year 20: ~$18,500 toward principal, ~$15,100 toward interest

2. [Property Appreciation](/blog/best-cities-for-appreciation-2026)

When your home's market value increases, your equity grows automatically—even if you don't make extra payments. Appreciation depends on:

Local market conditions
Neighborhood development
Economic factors
Supply and demand
Home improvements

In strong markets, appreciation can add tens of thousands to your equity annually. However, markets can also decline, which is why equity isn't guaranteed to only go up.

How to [Build Home Equity Faster](/blog/build-home-equity-faster)

While regular mortgage payments and [market appreciation](/blog/equity-vs-appreciation) build equity naturally, several strategies can accelerate the process.

1. Make Extra Principal Payments

Even small additional payments can shave years off your mortgage and save thousands in interest.

Strategy: Add just $200/month extra to a $400,000, 30-year mortgage at 6.5%, and you'll:

Pay off the loan 6 years early
Save over $87,000 in interest
Build equity significantly faster

Make sure extra payments are applied to principal, not future payments. Specify this when submitting payments.

2. Make Biweekly Payments

Instead of 12 monthly payments, make half-payments every two weeks. You'll make 26 half-payments (13 full payments) per year—one extra payment annually without feeling the pinch.

3. Refinance to a Shorter Term

Switching from a 30-year to a 15-year mortgage means higher monthly payments but dramatically faster equity growth. You'll also pay far less interest over the life of the loan.

Example: $400,000 loan at 6%

30-year: $2,398/month, $463,000 total interest
15-year: $3,375/month, $207,000 total interest

The 15-year costs $977/month more but saves $256,000 in interest.

4. Increase Your Home's Value

Strategic improvements can boost your home's market value, creating instant equity. Focus on projects with the highest return on investment (ROI):

High-ROI improvements:

Kitchen remodels (minor): 85-95% ROI
Bathroom updates: 70-80% ROI
Curb appeal (landscaping, paint): 75-100% ROI
Energy-efficient upgrades: 70-80% ROI
Adding usable square footage: 60-80% ROI

Avoid over-improving for your neighborhood, which can limit appreciation potential.

5. Avoid Taking Out Home Equity

While equity loans and HELOCs can be useful, they reduce your equity and add debt. Use them strategically for investments that increase home value or generate returns, not for consumption.

6. Make a Larger Down Payment

Starting with 20% down instead of 3-5% means you begin with immediate equity, avoid PMI, and have lower monthly payments, making it easier to pay extra toward principal.

7. Stay in Your Home Longer

The longer you own your home, the more time both principal paydown and appreciation have to work in your favor. Transaction costs (realtor fees, closing costs) can eat into equity when you sell too quickly.

8. Maintain Your Property

Deferred maintenance can hurt your home's value. Regular upkeep—roof repairs, HVAC maintenance, fixing leaks—protects your investment and prevents value loss.

Common Equity Mistakes to Avoid

1. Assuming Appreciation Is Guaranteed

While home values generally trend upward over time, local markets can decline. Don't count on appreciation alone—focus on paying down the mortgage.

2. Treating Your Home Like an ATM

Repeatedly tapping equity for non-essential spending puts you at risk if values decline or you need to sell unexpectedly.

3. Ignoring PMI Removal Options

If you're paying PMI and your equity reaches 20%, request removal. Some lenders don't automatically cancel it.

4. Over-Leveraging

Keeping some equity cushion protects you from being underwater if the market dips. Borrowing against every dollar of equity is risky.

5. Not Tracking Your Home's Value

Monitor local market trends and your home's estimated value using tools like Zillow, Redfin, or professional appraisals. Knowing your equity helps with financial planning.

How to Calculate Your Current Home Equity

Step 1: Determine your home's current market value

Use online estimators (Zillow, Redfin, Realtor.com)
Get a professional appraisal ($300-$500)
Review recent comparable sales in your area

Step 2: Find your current mortgage balance

Check your latest mortgage statement
Log into your lender's online portal
Call your loan servicer

Step 3: Subtract mortgage balance from home value

Current Value - Mortgage Balance = Your Equity

Step 4: Calculate your [equity percentage](/blog/how-to-calculate-home-equity)

(Equity ÷ Current Value) × 100 = Equity Percentage

When to Use Your Home Equity

Having equity doesn't mean you should tap it, but there are smart reasons to access it:

✅ Good reasons:

Home improvements that increase value
Consolidating high-interest debt (if you're disciplined)
Education or career advancement with clear ROI
Emergency expenses when no other option exists
Investment opportunities with strong returns

❌ Poor reasons:

Vacations or luxury purchases
Day-to-day living expenses
Risky investments
Funding a lifestyle you can't otherwise afford

The Bottom Line

Home equity is one of the most reliable ways to build wealth over time. By understanding how it works and implementing strategies to accelerate growth—like making extra payments, choosing shorter loan terms, and investing in smart improvements—you can maximize this powerful financial tool.

Remember: equity builds slowly at first but accelerates over time. The key is consistency, patience, and making strategic decisions that align with your long-term financial goals.

Ready to track your equity growth? Use HonestCasa's free home value tracker to monitor your equity in real-time and get personalized recommendations for building wealth through homeownership.

Home Equity Explained

Key Takeaways