How to Build Equity in a Home: 5 Strategies

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Building home equity isn’t just about paying down your mortgage — it’s about making the most of your biggest asset. Whether it’s choosing the right mortgage terms, making strategic upgrades or avoiding common pitfalls that can slow equity growth, we’ll cover five smart ways to build your home equity.

Home equity is how much of the home’s value you own outright, separate from any remaining mortgage debt. To calculate your home equity, just subtract your current mortgage balance from your home’s value. Or, you can also use a home equity loan calculator.

If you aren’t sure of your home’s current value, you can use a home value estimator or contact your real estate agent to request a comparative market analysis (CMA) based on recent home sales in your area. Your mortgage statement will show your loan balance.

Remember: Building home equity isn’t just about what you pay toward your mortgage. Homes usually gain value over time (also known as “appreciating”), which can boost your home equity without you doing anything.

How much home equity does the average homeowner have?

The average homeowner has $212,000 of home equity, according to data from ICE Mortgage Technology’s mortgage monitor report. One of the big perks of homeownership is the ability to borrow money at a relatively low rate when it’s secured by your home equity.

How do you build equity in a home?

1. Make a bigger down payment

The larger your down payment, the more home equity you’ll start off with. As an added bonus, a big down payment can help lower your loan amount, which in turn gives you a lower monthly payment.

If you take out a conventional loan, a larger down payment (at least 20%) also means you’ll eliminate the need to pay private mortgage insurance (PMI) premiums.

2. Pick a shorter loan term

You’ll fast track your home equity growth if you can afford the higher payment that comes with a shorter-term loan. For example, choosing a 15-year versus 30-year mortgage can help you hack away at your loan balance much faster, leaving you more equity and saving you thousands in total interest charges. An added bonus: 15-year mortgage rates are usually lower than 30-year rates.

The table below shows how much more equity you’ll have after just five years of paying a 15-year fixed-rate mortgage at 5.83%, versus a 30-year fixed-rate of 6.83%. This example assumes a $300,000 loan balance on a $375,000 home.

Loan term	Home equity percentage after 5 years*	Home equity dollar amount after 5 years*	Monthly principal and interest payment
30-year fixed rate	25%	$93,100	$1,961.77
15-year fixed rate	39%	$147,700	$2,504.10

*Based on a $375,000 sales price with a $75,000 down payment.

Takeaway: By choosing a 15-year fixed loan instead of a 30-year loan, you’ll have built up nearly $55,000 (or 14 percentage points) more in home equity after five years. But your monthly payments will also be $542 greater than you’d pay with a 30-year fixed loan.

3. Make extra loan payments

Think about applying holiday gift money, tax refunds or bonus checks from work toward your monthly payment. You may even want to set yourself up for biweekly mortgage payments, which can knock multiple years off your repayment term.

4. Avoid government-backed loans

Loans insured or guaranteed by the government come with upfront fees that are generally rolled into your loan balance, which reduces your home equity. The table below explains the programs and related fees, so you can be on the lookout for these equity-shrinking charges.

Loan type	Fee amount	What the fee is
FHA	1.75% of loan amount	Upfront mortgage insurance premium (UFMIP) for most loans backed by the Federal Housing Administration (FHA)
VA	0.5% to 3.3% of loan amount	Funding fee to offset taxpayers’ expense of loans made to military borrowers and backed by the U.S. Department of Veterans Affairs (VA)
USDA	1% of loan amount	Guarantee fee charged for loans backed by the U.S. Department of Agriculture (USDA) to finance homes in designated rural areas for low- to moderate-income borrowers

Although most borrowers finance the FHA UFMIP or VA funding fees, you can also choose to pay for them in cash or ask the seller to cover them.

5. Add value with home improvements

Check out a cost versus value report for clues as to which home improvements are seeing the most return in added home value. You can browse local for-sale listings to see what kind of features homebuyers are willing to pay a premium for. Try to avoid financing the improvements with your home equity.

However, if the improvements eat into your cash reserves too much, it may be worth it to consider a home improvement loan. Some renovation loans (like the FHA 203(k) loan program) even allow you to finance the home improvements with a mortgage based on your home’s estimated value after the project is complete.

How your mortgage rate affects your equity

At LendingTree, we see it all the time: Borrowers who comparison shop for mortgage rates with at least three to five lenders save thousands over the life of their loan. A lower interest rate also puts more of your monthly payment toward your loan balance instead of interest charges. That said, a small reduction in your rate will have a pretty modest impact on how quickly you build equity in a home.

The example below compares how fast your equity grows for two 30-year fixed-rate loans with interest rates only 0.25 percentage points apart. We’ll assume you bought a $375,000 home and made a $75,000 down payment.

Interest rate	Home equity after 5 years	Home equity after 10 years
6.55%	$94,000	$120,400
6.80%	$93,200	$118,800

Takeaway: A quarter-point difference in mortgage rate gained you:

$800 of additional equity over five years
$1,600 of additional equity over 10 years

When is it smart to use your home equity?

If your goal is to build equity in a home, it may feel like a step backward to utilize your equity along the way. However, there are some situations where it makes sense to leverage equity rather than preserve or build it:

To pay off high-interest debt. If you racked up some credit cards due to unexpected expenses like a medical procedure or car repair, a home equity loan, home equity line of credit (HELOC) or cash-out refinance may clear out those balances. Plus, if the cards are maxed out, paying them off may help boost your credit scores. One caveat: You can’t write off home equity loan interest unless it’s used for home improvements.
To make tax-deductible home improvements. Not only can you write off the mortgage interest for borrowing against your home equity for renovations, but if you make major improvements — like making an addition or installing a new HVAC system — these changes can reduce your capital gains tax.
To get a credit line for emergencies. Life happens, and if your emergency fund is a little low right now, a HELOC may be a good backup plan — you don’t have to use the funds unless you need them. Be sure to shop around to find HELOC lenders with the lowest fees.

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