Home equity can grow over time and help you build wealth.
Equity can change as you pay down your mortgage, and as home values fluctuate.
To boost home equity, you can make a larger down payment, make larger or more frequent mortgage payments, refinance to a shorter loan term, or complete home improvements.
One of the greatest benefits of homeownership is the opportunity to build wealth.
As you pay down your mortgage, you build equity — the dollar amount of your home that you own. The more equity you have, the more money you have in your home to use now or down the road.
One way to estimate your home equity is to subtract your mortgage balance from your home’s current market value. For instance, if your home is valued at $350,000 and you owe $200,000, your equity would be $150,000 ($350,000 - $200,000 = $150,000).
If the result is more than zero, you have positive equity. If the number is less than zero, it means you owe more on the mortgage than the equity is worth.
How do you build equity in your home?
Equity can depend on your home’s value and your mortgage balance. You may be able to boost your home equity by tweaking these factors. Here are some potential strategies.
Make a bigger down payment. If you make a larger down payment, you’ll have more equity in your home upfront and could pay less interest over the life of the loan. You might also be able to avoid paying for mortgage insurance.
Make extra mortgage payments. When you make additional or larger-than-required payments, you can allocate the excess to the principal. This may help you build equity faster and potentially shorten the loan term by reducing the amount of interest you pay.
Make more frequent mortgage payments. If you pay half of your monthly mortgage payment every two weeks, for example, you’ll end up making an extra payment each year. This way, you might build equity faster and have a shorter loan term, which means less interest.
Refinance to a shorter loan term. A shorter loan term usually means higher monthly payments. But if you refinance, you could build equity faster and potentially save more in interest.
Make home improvements. Home values tend to increase over time, but you may boost your home’s value faster by making certain home updates and upgrades. Some projects add more value than others, so do your homework to ensure you get the most bang for your buck.
Why is building home equity important?
Most importantly, home equity may help you build long-term wealth. A mortgage could be considered a type of “forced savings” because you have to make regular payments or risk losing the home. As you pay down debt, you can build equity and wealth.
Home equity can also come in handy when expenses arise. You might be able to convert your equity to cash — via a home equity loan, home equity line of credit (HELOC), or cash-out refinance — to pay for renovations, college tuition, medical bills, or other expenses. Generally, the more equity you have, the more you can borrow and the more cash you can keep if you sell the home.
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.