How to Build Equity in A Home
Your equity is the difference between what you own and what you owe on your mortgage—knowing how to grow it can help you save money, and even make a profit!
Written by Claire Beaney
Reviewed by Melanie Reiff
Table of Contents
- What is equity?
- Why it’s important to build equity in your home
- How to build equity in your home
- Saving money with Jerry
- FAQs
Load full table of contents
Home equity is the amount of your home that you own outright, free from financing. It’s important to build equity, as it can be a resource you can profit from over time.
Building equity can be extremely helpful down the line, allowing you to borrow from your equity as a loan, invest this money, build wealth long-term, or even sell your home for a higher price.
To help you understand more about home equities and all it entails, the licensed
insurance broker
and comparison shopping app Jerry
has gathered everything you need to know down below.Let Jerry find your price in only 45 seconds
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What is equity?
In real estate, home equity refers to the portion of your home that you own after deducting your current mortgage from the market value of the property.
If, for example, your home is worth $350,000, and you owe $100,000 on your mortgage, you can use the following formula to calculate your home equity:
$350,000 - $100,000 = $250,000
So, in that instance, you would have built $250,000 in equity in your home.
Why it’s important to build equity in your home
In essence, your home equity is an asset, just like your vehicle or other valuable possessions. The more money you put into this asset, the more ownership you'll have over it, and the more valuable it will become in the end.
There are a number of worthwhile reasons to build equity in your home:
- The more equity you have, the more money you can borrow.
- You’ll be able to sell the property for more than the amount owed on the mortgage.
- Profits from your sale can be used to buy another property, pay off other debts, or invest—you can essentially build long-term wealth!
How to build equity in your home
There are several methods for gaining equity in your home.
Make a large down payment
Your down payment kick-starts the equity you create over time, and starting with a higher down payment increases your equity in the home immediately.
When calculating your down payment, keep in mind how much money you'll have left over after closing! Leaving oneself with next to no cash reserves may make it more difficult to deal with any financial crises that happen, as well as make it more difficult to cover your normal monthly payment.
Increase your property’s value
Making renovations to your property can also increase its value and, as a result, your equity. Just remember that you will likely not recuperate all of your investment put into home improvement projects.
And just so you know—the project with the highest return on investment is a garage door replacement, which has a 93% return.
Pay more on your mortgage
If you make additional payments toward your mortgage's principal each month, you will create equity faster by lowering the total amount owed on your debt.
This can mean switching to biweekly payments, adding a certain higher amount each month, or using any extra money that comes your way.
Refinance your loan to a shorter-term
A shorter loan term has two main advantages: you usually have a lower interest rate, and more of your monthly mortgage payment goes toward the principal, increasing your equity.
Wait for your home’s value to rise
Because local property markets vary over time, the value of your home may fluctuate. When housing prices in your neighborhood rise and demand increases, the value of your home rises naturally.
This increase in house value increases the amount of equity you have.
Saving money with Jerry
While building equity in your home is truly helpful in the long run, there are many ways to save money on your house during its lifetime.
Making sure you have the right
home insurance
is one of these methods—if you don’t take the time to compare quotes before policy renewal, you could be missing out on hundreds of dollars worth of savings!A licensed broker that offers end-to-end support, the Jerry app gathers affordable quotes, helps you switch plans, and helps to cancel your old policy. Even better—Jerry will help you
bundle your home and auto policies
for maximum savings. “It’s my first time buying insurance.Jerry? Amazing. It’s easy to sign up and even easier to save money.” —Christina A.
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FAQs
What is equity?
Home equity is the difference between your property’s value and the amount you owe on your mortgage.
The difference between the value of your property and the amount owed on your mortgage is referred to as home equity. For example, if your house is worth $500,000 but you owe $200,000 on it, then you have $300,000 in home equity.
How much equity should I have in my home?
Lenders typically want a home equity of 20% or more, depending on your financial history. This home equity rate can allow you to borrow up to 80% of the total value of your home.
Save an average of 18% by bundling your home and auto insurance
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