How to build equity in a home

Homeowners making their monthly mortgage payments are on their way to building one of the greatest drivers of wealth for Americans: home equity. But waiting to pay off a mortgage — especially if it has 15- or 30-year terms — can be a long time to wait to reach 100% equity. Considering that home equity is useful when making enormous purchases, including buying your next home, gaining as much equity as quickly as possible is a goal for many.

If you’re looking to build equity in your home and don’t want to wait, there are several options for doing so, including recasting your mortgage, refinancing, or remodeling to boost your home’s value. Just be wary of financing that creates negative equity (or decreases in your home equity) like home equity loans and lines of credit.

What is home equity?

Home equity is the portion of a home’s value that belongs to the homeowner. In other words, it’s the part of a property’s value that the homeowner doesn’t have to repay to their mortgage lender (or other creditor).

If you just took out a mortgage with a 0% down payment, you don't have any home equity yet because you still need to repay the entire amount your home is worth.

On the other hand, if you've finished paying off your mortgage and you aren't borrowing against your home through a home equity loan or a home equity line of credit, you have 100% equity. The entire value of your home is yours, and you don't owe any money on the property.

Many people will find themselves somewhere in the middle, having built up equity but with a mortgage balance they still need to pay off.

How long does it take to build equity?

Accumulating equity doesn’t happen all at once. Building equity is typically a many-years long process, and just how long it takes will depend on a homeowner’s mortgage terms and any other loans, liens, or lines of credit for which the house is collateral.

If you have a fully amortizing mortgage (as opposed to an interest-only mortgage)— where part of each monthly payment goes toward interest and part pays down your principal — you'll build equity slowly at first and faster later in the life of your loan. The repayment schedule for a fully amortizing loan requires a big share of each payment to go to interest in the beginning. Then, as time goes on, the balance between paying the principal and interest gradually shifts, so that principal is a much bigger share of each payment when you come to the end of the loan term. 

Building equity depends greatly on these two things:

Mortgage principal

Equity goes up when you pay down the principal of your mortgage or of any home equity loans or home equity lines of credit that you have on your home. Note that paying interest doesn't add to your equity, so it will take longer for homeowners with amortized mortgages with higher interest payments at first to build home equity.

Home value appreciation

Your equity also grows when your home's value goes up (aka appreciation). Many things can change the value of your home, but some significant ones are supply and demand in the housing market, trends in which features people look for in a home, and whether your location is becoming more popular with buyers. 

How to calculate home equity

You can calculate your home equity by subtracting your mortgage balance and any other balances against your home from your home’s value. Here’s a closer look at how to do so:

1. Estimate how much your home is worth
2. Tally up how much you owe on your home
3. Subtract what you owe, from your home's value (step 1 minus step 2)
4. Divide that dollar amount by your home's value (step 3 divided by step 2)
5. Multiply by 100

You will first need to know how much your home is worth. Finding a precise dollar amount for your home’s value would require hiring an appraiser, but you can do some back-of-the-envelope math and use an online estimator.

You’ll also need to know how much you owe on your home. Add up your outstanding mortgage balance (available on your monthly mortgage statements) and the remaining balances on any home equity loans or home equity lines of credit you've taken out to find the total you have to repay.

Your home equity can be expressed as a dollar amount or a percentage. To find your equity as a dollar amount, subtract what you owe on or against your home from your home’s value:

Home value - (mortgage balance + other balances against home) = Equity as dollar amount 

To find your equity as a percentage, divide your dollar amount equity by your home’s value, then multiply that number by 100:

(Equity as dollar amount / home value) X 100  = Equity as percentage

For example, if your home is worth $300,000, you have $120,000 left on your mortgage and you have a $30,000 balance on a home equity loan, your equity is $300,000 - ($120,000 + $30,000) = $150,000.

If you express that number as a percentage [($150,000 / $300,000) X 100], you have 50% equity.

4 steps to building home equity

But there’s more you can do to build equity than just waiting for your home to appreciate. If you'd like to gain equity faster, these four steps can help speed things up. 

1. Make a larger down payment

If you make a bigger down payment when you buy a home, you start out with more equity. An advantage of making a sizable down payment is that you get a big chunk of equity all at once, rather than having to gradually build it up over time.

Don’t worry if you already took out your home loan, you can still build equity with a larger down payment by recasting your mortgage. In a mortgage or loan recast, a borrower will make a lump-sum payment towards the principal balance on the loan, and the lender will reamortize (or recalculate) the remaining payments.

2. Make extra payments

Usually, lenders allow you to pay extra on your mortgage each month if you choose to. If you make additional payments toward the principal, you can pay your loan down faster, which means your equity goes up faster.

This strategy could be especially helpful in the first few years of your mortgage, when a large share of each monthly payment goes to interest. While you'd ordinarily build equity slowly during these years, making extra payments allows you to tackle more of the principal early on.

Just make sure you talk to your lender and specify that you want your additional payments to go toward the loan principal. If you don't have this conversation, your lender might assume you want the money to be used for your next month's payment, in which case part of it would go to interest instead of growing your equity.

3. Refinance to get a shorter term

Refinancing can allow you to pay off your mortgage sooner and shorten the timetable for building equity. Let's say you've got 20 years left on your mortgage. If you refinance to a new loan with a 10-year term, you're now on schedule to get to full equity in your home an entire decade earlier.

4. Boost your home's value

Since your equity is the value of your home minus how much you owe on it, another way to grow your equity is to increase your home's worth. You can do this by remodeling or upgrading your property or by getting involved in making your neighborhood a more attractive place to buy a home — such as by collaborating with your neighbors to add greenery or clean up pollution in the area.

Keep in mind, though, that home values depend on a lot of economic factors outside of your control and that your equity may not go up by as much as you'd hope. For instance, remodeling usually raises a home's sale price by just a fraction of the amount homeowners spend on the work. So trying to enhance your home's value is not a surefire way to gain equity.

→ Learn more about how to increase the value

What is negative equity?

If you owe more on your house than it is worth, you can end up with negative equity. This is also known as having an underwater mortgage, and occurs when the loan-to-value ratio of your home loan exceeds 100%.

Depending on your state's laws, you might not be able to sell your home while your equity is negative unless you can produce enough cash to pay off the whole amount you owe, or unless your lender agrees to let you off the hook for the difference. Selling your home with negative equity is called a short sale, and it will generally hurt your credit, which can make it more difficult to get approved for a mortgage the next time around.

Why does home equity go down?

Home equity decreasing doesn’t automatically mean that you will have negative equity in your home. There are several factors that can contribute to negative equity in a home, including:

• Fluctuating home values due to market conditions
• Using the home as collateral for a home equity loan or line of credit
• Getting a cash-out refinance and replacing your current mortgage with a larger one
• High-interest home loans where minimal proportions of monthly payments are applied to the principal
• Property falling into severe disrepair

Why home equity matters

Home equity is important for a few reasons. First, when you build equity, you're raising your net worth. Building equity can put you in a better position to pursue your goals and help protect you against financial setbacks.

Once you've amassed enough equity, you might be able to borrow against it with a home equity loan or home equity line of credit. Using your home equity as collateral could get you a better interest rate than you'd be charged on a personal loan or a credit card. 

And if you use equity as collateral, you might be approved for a larger loan amount than you would otherwise qualify for. So home equity potentially offers a way to finance upgrades to your home or other big purchases.

How much equity you have affects how much cash you can get from selling your home. If you sell, the money paid by the buyer first goes toward paying off your mortgage as well as any outstanding balances on home equity loans or home equity lines of credit. It also pays off other liens, or legal claims to your property, if there are any, and it covers your real estate agent's commission and other costs of the sale. Then, you get to keep what's left over. Use our Home Sale Calculator to see how much you can make by selling your house:

If you have a lot of equity in your home and you decide to sell, you might walk away from the transaction with a significant sum that you could use toward the down payment on your next place. But if you haven't been able to acquire much equity, you might get little or no profit from selling your home. It's important to be aware of how much equity you have before deciding to sell so that you understand how much of the proceeds you can expect to pocket.