How to build equity in your home: Six strategies to grow your wealth

Every mortgage payment you make is more than a bill. Think of it as a step toward building real wealth in the form of home equity. 

Home equity is one of the most powerful financial tools available to homeowners. Put simply, it’s the portion of your home that you truly own: the difference between what your home is worth and what you still owe on your mortgage. 

Whether you just bought your first home or you’ve been a homeowner for years, understanding how to build equity in a home faster could help you grow your net worth and open new financial options down the road. 

What is home equity, and how does it work?

Home equity equals your home’s current market value minus your remaining mortgage balance. If your home is worth $350,000 and you owe $200,000 on your mortgage, you have $150,000 in home equity.

Equity grows in two ways:

• You pay down your mortgage principal. Each payment reduces what you owe, increasing the share of the home you own.

• Your home’s market value increases. Appreciation adds to equity without any extra effort on your part.

Equity could also decrease. Borrowing against it through a home equity loan or a typical cash-out refinance reduces your equity balance. A drop in your home’s market value has the same effect.

One more thing to know: Equity is not liquid cash. To access it, you would need to sell your home or borrow against the equity you’ve built.

Six strategies to build equity in your home faster

1. Make a larger down payment

The more you put down when you buy your home, the more equity you start with from day one. A 20% down payment on a $300,000 home gives you $60,000 in equity at closing. A 5% down payment gives you $15,000.

A larger down payment could also eliminate the need for private mortgage insurance (PMI) in many cases, reducing your monthly payment. You could redirect those savings toward your mortgage principal each month, compounding the equity benefit over time.

This strategy applies to future home purchases. For current homeowners, the strategies below are where to focus.

2. Make extra payments toward your mortgage principal

Even small additional payments toward your principal each month could save thousands in interest and shorten your loan term. The math works because of how mortgage amortization functions. In the early years, most of each payment goes toward interest rather than principal. Extra principal payments reduce the balance that interest is calculated on, so more of every future payment goes toward ownership.

An extra $100 per month toward your principal could make a meaningful difference over a 30-year loan. Before you start, confirm with your lender that there are no prepayment penalties and that extra payments are applied to principal.

3. Switch to biweekly mortgage payments

Biweekly payments are a simple way to squeeze in one extra mortgage payment a year. Instead of 12 monthly payments, you make a half-payment every two weeks. That works out to 26 half-payments, or the equivalent of 13 full monthly payments, annually. The extra payment goes directly toward your principal, growing your equity faster while spreading the cost across smaller, more frequent transfers.

Check with your lender on how to set this up. Some lenders process biweekly payments automatically; others require you to request them or make separate arrangements.

4. Choose a shorter loan term

A 15-year mortgage builds equity faster than a 30-year mortgage. A larger share of each payment goes toward principal from the start, and the loan carries a lower interest rate in most cases. The trade-off is a higher monthly payment.

If you already have a 30-year mortgage, you could refinance to a 15-year term to accelerate equity growth. Factor in closing costs when you run the numbers. The interest savings and equity benefit need to outweigh the upfront expense for this move to make sense.

5. Make strategic home improvements

Certain renovations could increase your home’s market value, which adds directly to your equity. High-return improvements generally include kitchen upgrades, bathroom remodels, and curb appeal projects such as landscaping, exterior paint, and garage door replacement.

Homeowners sometimes use a home equity line of credit for a remodel to fund improvements that increase their home’s value by reinvesting equity to build more equity. That approach works when the renovation adds more value than the cost of borrowing.

6. Avoid borrowing against your equity unless the purpose creates value

Once you've built equity, you have options for how to use it. A typical cash-out refinance or HELOC reduces your equity balance, so the question is whether the use restores or grows that equity over time. 

Two scenarios tend to make the math work: funding home improvements that increase your property value, and consolidating high-interest debt to strengthen your overall financial position. Consolidating debt could save you money on interest, allowing you to eventually make larger payments toward your mortgage’s principal. 

How market appreciation builds equity

Home values have historically appreciated over time, though the rate varies by location, market conditions, and economic cycles. Nationally, average annual home price appreciation has historically ranged around 3–5%. This is not guaranteed, and individual markets could vary significantly.

Appreciation is passive equity growth. You benefit simply by owning the home. For homeowners in markets with strong demand, appreciation could add substantial equity over a holding period of five years or more.

Markets might also decline. Home values could decrease during some periods, reducing equity. This is not common, but it’s a possibility to plan around. Relying on appreciation without also paying down the principal leaves your equity growth dependent on factors outside your control.

What you could do with home equity once you’ve built it

Home equity creates options. Once you’ve accumulated meaningful equity in your home, here are the most common ways to put it to work.

• Home equity loan. A home equity loan is a one-time loan at a fixed rate, repaid in fixed monthly installments. 

• HELOC (home equity line of credit). A home equity line of credit is a tool you could use to borrow against your equity, repay the balance, and borrow again up to your credit limit. 

• Sell your home. Your equity becomes profit when you sell. Homeowners who have held their property through a period of appreciation often walk away with a substantial return. 

Achieve Loans offers HELOCs with fixed rates. Find out if you qualify and talk to a mortgage advisor about your options.