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Home equity represents the portion of your property that you truly own—the difference between its current market value and the outstanding balance on your mortgage. It is a cornerstone of building long-term wealth through homeownership. This guide explains how to calculate your equity, outlines five effective strategies to build it without straining your budget, and details how you can access it when needed.
How Do You Calculate Your Home Equity? Calculating your home equity is straightforward. You subtract the total amount you owe on all mortgages from your home's current appraised value. For example, if your home is worth $400,000 and your remaining mortgage balance is $300,000, your equity is $100,000, or 25%. When you first purchase a home, your equity is essentially your down payment. Data from the Federal Housing Finance Agency (FHFA) shows that house prices increased by approximately 16.5% from Q1 2020 to Q1 2022, highlighting how market appreciation can rapidly boost equity beyond initial investments.
What Are the Best Ways to Build Home Equity? Building equity involves increasing your home's value and reducing your mortgage debt. Here are five practical methods.
Benefit from Market Appreciation Home price appreciation is a powerful, passive way to build equity. While market conditions fluctuate, historical data indicates long-term growth. Based on our experience assessment, buying a home sooner, even with a smaller down payment, can be more advantageous than waiting years to save 20% if prices are rising. A key benefit is that the IRS allows you to exclude up to $250,000 (or $500,000 for married couples filing jointly) of capital gains from the sale of your primary residence, making this equity growth tax-free.
Make a Larger Down Payment (When Practical) A larger down payment instantly gives you more equity. However, it's crucial to balance this goal with maintaining sufficient cash reserves for emergencies and other financial priorities. Do not drain your savings for a larger down payment if it leaves you financially vulnerable.
Apply Financial Windfalls to Your Mortgage Using unexpected funds like work bonuses, tax refunds, or inheritances to make lump-sum payments on your mortgage principal can significantly reduce your loan balance and accelerate equity building. Contact your lender to ensure the extra payment is applied correctly to the principal and inquire if they can "recast" your mortgage, which would lower your future monthly payments based on the new balance.
Switch to Biweekly Mortgage Payments Instead of making one full payment monthly, you pay half of your mortgage every two weeks. This results in 26 half-payments, or 13 full payments, per year. The extra payment goes directly toward your principal, helping you build equity faster and potentially pay off a 30-year loan several years early. Confirm with your lender that they offer this option without processing fees.
Choose a Shorter Loan Term Opting for a 15-year fixed-rate mortgage instead of a 30-year term means you'll build equity at twice the speed because a larger portion of each payment goes toward the principal from the start. The trade-off is a significantly higher monthly payment, which requires a strong, stable income to qualify for and manage comfortably.
How Can You Access Your Home Equity? You can access your equity through loans or by selling the property. Common borrowing options include:
Each option has distinct advantages and costs. Interest rates can vary, so it's essential to compare terms and consult a lender to determine the best fit for your financial situation.
Building equity is a long-term strategy that combines smart market timing, consistent debt reduction, and strategic financial decisions. The most sustainable approach is one that aligns with your overall budget and financial goals, allowing you to grow your wealth steadily through your home.
