Building equity in a home is a good thing because it is!

The importance of owning a home goes beyond having a personal space. At the heart of this lies the notion of constructing home equity. And, that plays a crucial role in enhancing your financial prospects. Building equity in a home is a good thing because it can get you a lot of advantages. 

Whether you are embarking on your first home purchase or are an experienced homeowner, understanding what your home is worth is fundamental. 

What is home equity?

Home equity signifies the portion of your home that you own entirely. If you’ve paid off your mortgage or purchased your home outright, you possess 100 percent equity. Otherwise, you determine your equity by deducting your mortgage balance from your home’s present market value. 

For example, if your home is valued at $500,000 and your mortgage balance is $250,000, your equity would be $250,000 ($500,000 – $250,000).

How does home equity work?

Each mortgage payment you make reduces the amount you owe and usually increases your equity. Additionally, if your home’s market value increases over time, your equity grows even more. This growth in equity can offer you opportunities for further investments. The bottom line is that it acts as a safety net in your overall financial strategy.

What is the relevance of home equity, in real estate?

If you own a home, your monthly mortgage payments contribute to building home equity. It signifies the portion of your home that you fully own, minus what you owe. As you continue to pay off your mortgage, your equity grows over time, making your home a more valuable asset and boosting your overall net worth.

While you can cash in on this equity when you sell your home, it can also be used to cover significant expenses such as renovations, college fees, or other financial obligations while you still reside there. Thus, enhancing home equity is a crucial aspect of homeownership.

Furthermore, understanding your equity is important if you plan to use home equity to secure a loan. All lenders base borrowing amounts on it. Generally, the more equity you possess, the higher the borrowing capacity. 

Why else is building home equity important?

Building equity in a home is a good thing because of many important factors. For starters, not only does it serve as a dependable method for creating wealth, but it also aids in maintaining the home during your occupancy. Building equity in a property offers several advantages. Some of these include:

• Homeowners can leverage the value of their homes through loan options such as home equity loans and home equity lines of credit (HELOC). With a home equity loan, the funds are received upfront, and repayment occurs over a period of up to 30 years. Conversely, a line of credit or HELOC offers a draw period (typically five to 10 years) where funds can be withdrawn as needed, accompanied by interest-only payments, followed by a repayment period (usually 10 to 20 years) for repaying both principal and interest.
• Building equity increases the likelihood of making a profit upon selling the home. Even if, there’s an outstanding loan balance or a market downturn. The net proceeds from the home sale can be utilized to purchase another home, settle other debts, or invest elsewhere.
• Home equity contributes to long-term wealth accumulation. It aids in increasing net worth over time, particularly if the home was purchased during a favorable market period. Unlike assets such as cars that depreciate, homes have the potential to appreciate in value. This serves as a source of wealth for future generations.

How is your home equity related to your credit score?

As equity in a home increases, it can positively impact an individual’s credit score in several ways:

Lower credit utilization ratio

Owning a home increases your equity as you make mortgage payments and as the home’s value goes up. This higher equity reduces your loan-to-value ratio, which can improve your credit utilization. What is credit utilization? It’s how much credit you’re using compared to what’s available. Keeping balances low relative to available credit can raise your credit scores.

Improved debt-to-income ratio

As equity increases in a home, it indicates less mortgage debt compared to the property’s value. This decrease in mortgage debt can lead to a lower debt-to-income ratio, which compares total debt payments to gross income. Lenders typically use the debt-to-income ratio to evaluate your creditworthiness. And, a lower ratio can lead to a higher credit score.

Greater financial stability

Building equity in a home shows responsible financial behavior and stability. It demonstrates effective debt management and the ability to meet financial obligations. Lenders see individuals with higher home equity as less risky borrowers. And this can boost your credit scores.

Access to home equity loans or lines of credit

Growing home equity opens up possibilities for obtaining extra funds through home equity loans or lines of credit. These loans usually come with lower interest rates than unsecured loans. By managing and using these credit lines responsibly, individuals can show creditworthiness and potentially enhance their credit scores gradually.

How can you determine your home equity?

Here are several approaches to help you determine the equity in your home:

• Review your mortgage statement: Your most recent mortgage statement displays your current mortgage balance. Subtract this amount from your home’s estimated current value to ascertain your equity.
• Obtain a professional home appraisal: Enlisting a professional appraiser will furnish you with the most accurate evaluation of your home’s current value.
• Seek guidance from a real estate agent: Real estate agents can conduct a comparative market analysis (CMA), comparing your home to similar properties in the vicinity to estimate its value.

How can I utilize my home equity to get funds?

Using your home equity may be more complex than say withdrawing money from a checking or savings account but it does give you access to a good amount of money. Here are some ways to tap into your home equity.

• Home equity loan aka second mortgage: This loan involves borrowing a lump sum with a fixed interest rate and set repayment period, alongside your primary mortgage.
• Cash-out refinance: By refinancing your primary mortgage for a higher amount than you owe, you receive the difference as cash or extra money, potentially with a lower interest rate or simpler payment structure.
• Home equity line of credit (HELOC): Similar to a credit card, a HELOC offers a revolving line of credit where you borrow as needed, making payments only on the amount withdrawn.
• Reverse mortgage: Available to qualifying seniors, a reverse mortgage lets you borrow against home equity without repayment until you sell, move, or pass away.
• Selling your home: Selling your home allows you to access your equity, which you can use as a downpayment on a new home or supplement your income or retirement savings if downsizing.

How can you increase home equity?

There are several ways by which you can improve the equity value of your home. 

Opt for a substantial down payment

Your home equity corresponds to the portion of your home you own outright. It aligns with what you contribute directly, not financed through a loan. Therefore, a larger down payment instantly elevates your ownership stake.

Dodge mortgage insurance

Putting down at least 20 percent upon purchase helps avoid monthly private mortgage insurance (PMI) payments, thereby freeing up funds to nurture home equity.

Cover closing costs out of pocket

While lenders may propose rolling closing costs into your mortgage, paying them upfront proves more economical. This approach directs more funds toward the principal, reducing both the principal amount and interest charges.

Enhance your property value

Home improvements can elevate your home’s value and subsequently, your equity. However, it’s essential to prioritize projects with significant returns on investment (ROI). For example, renovating bathrooms and kitchens ranks high among value-boosting endeavors. Furthermore, integrating energy-efficient features not only enhances your home value but also reduces utility expenses. And, may qualify for tax credits.

By the way, not all improvements need to be extensive. Small changes such as a fresh coat of paint or enhancing curb appeal can yield substantial results as well.

Accelerate mortgage payments

Extra payments towards the principal expedite equity growth by decreasing the overall debt owed. While most mortgages follow an amortization schedule, allocating additional funds toward the principal hastens equity accumulation. You can verify this with your loan servicer and monitor your monthly statements.

Wait for the market value of your home to increase

A home typically appreciates over time, partly because the land it occupies tends to increase in value, given the finite nature of land resources. There are other factors that influence home appreciation. These include housing supply and demand dynamics, the market valuation of neighboring properties, commercial developments, and broader economic trends. However, it’s essential to maintain your home diligently. Neglecting home maintenance may dampen potential value growth or, worse, lead to a decline in value over time.

Opt for a shorter loan term through refinancing

Upon full repayment of your mortgage, you’ll achieve 100% equity in your home, assuming there are no other encumbrances on the property. Refinancing to a shorter loan term facilitates earlier loan payoff and translates to substantial interest savings compared to a longer term. It’s important to note that opting for a shorter term entails higher monthly payments. Additionally, be prepared for potential closing costs associated with the new loan. Ensure that you’re financially prepared to refinance to a shorter term before proceeding with your application.

Stay in your home longer

Homeowners who live in their homes for longer periods are more likely to build up equity over time. Typically, experts suggest that people who want to buy a home should follow the “five-year rule.” This means staying in the home for at least five years, which is usually enough time to start building equity to cover initial purchase costs. If the housing market slows down when you’re ready to sell, it might be a good idea to wait until the market improves and the value of your home goes up.

Building equity in a home is a good thing because…last thoughts

Accumulating home equity serves as a dependable method for wealth generation and enables homeowners to effectively upkeep their residences during occupancy. This process typically entails augmenting the value of your property and reducing mortgage debt. The appreciation of home equity typically parallels the rise in overall property values. Your home equity can come in handy for a lot of financial benefits. Therefore, it’s a smart idea to keep it high.

Written by Ramona Sinha. October 2, 2025

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.