Home equity: How to build it efficiently in 5 ways

As you make your monthly mortgage payments, you are building equity in your home. Your home equity represents the current value of your home minus what you owe on your mortgage, and it can increase over time.

Americans have accumulated nearly $10 trillion in home equity and the average homeowner now has more than $200,000 in equity. Some of the most common uses include education expenses, home repairs or renovations, wedding costs, debt consolidation, business expenses, long-term investments or emergency expenses.

As a homeowner, equity is your most valuable asset and it can be a great resource to tap into. It’s important to understand how equity works, how to build equity and how to use it sensibly.

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How to build equity in your home efficiently

Homeowners can build home equity either by increasing the value of their property or by reducing the amount of debt owed. Equity can be accessed through a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance.

When it comes to building equity in your home, here are some options:

1. Increasing mortgage payments
2. Mortgage refinancing
3. Making a down payment on your home
4. Increasing your property value

1. Increasing mortgage payments

Most homeowners make mortgage payments on a monthly basis, or 12 payments a year, until the loan is paid off. Part of each payment goes towards your principal and interest. By making more payments, you can put more money towards your principal each month and build home equity.

Talk to your lender and make sure your extra payments are going towards your principal. If you don’t, there’s a chance it may go towards the interest. Here are a few ways to pay down your mortgage principal faster:

• Make one extra payment per year
• Make small monthly payments towards your principal regularly
• Split your monthly mortgage payment in half and pay that amount every two weeks, allowing you to make an extra payment towards your mortgage each year
• Round up each mortgage payment

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2. Mortgage refinancing

Homeowners can do a mortgage refinance to get a lower interest rate and have more of their mortgage payment go towards their principal each month. By refinancing from a 30-year mortgage to a 15-year mortgage, you can pay off your mortgage much faster and build up home equity in a shorter amount of time. Use an online mortgage refinance calculator to determine new monthly costs.

3. Making a down payment on your home

Your down payment is your first payment towards kickstarting equity building. While there are options to put down as little as 3% — or even 0% with VA or USDA loans — putting down a large down payment will instantly build equity. Additionally, putting down at least 20% means you won’t be required to pay private mortgage insurance or PMI.

PMI protects the lender from potential loss and depending on your credit score and the details of your loan, could cost you anywhere between .20 to 1.5% of the original loan amount per year.

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4. Increasing your property value

You can make improvements to your home to raise the overall value of the property and increase your equity. A home renovation doesn’t have to be expensive. For example, you can add a fresh coat of paint to the kitchen or bathroom, update light fixtures or install a new front door.

One more thing: Home appreciation

The housing market is always changing and the value of your home can fluctuate. In real estate, home appreciation is the increase in the value of your property over time. Home appreciation can increase in your local market from inflation, an increase in job opportunities and demand for that particular neighborhood.

When home values appreciate, this boosts the amount of equity in your home. On the other hand, home prices can drop, meaning you could also lose that equity.

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The bottom line

When you build up home equity, it can be an asset you can draw from, usually up to 80% of your home’s value, or a nice cushion in a market downturn. Keep in mind that home equity is a long-term investment and just because you can borrow against your home equity, doesn’t mean you should.

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