8 Ways to Build Equity in Your Home in 2024

Home equity is a powerful asset and a key aspect of homeownership. It represents the portion of your home that you fully own, free from any financing obligations. As you pay down your mortgage and your property value appreciates, your equity increases, enhancing your home’s value.

Whether you’re a new homeowner or have owned your home for years, it’s essential to understand how your equity grows and how you can foster its increase. Building home equity helps you create a valuable asset over time and boosts your overall net worth.

Here’s how to build equity in your home—starting even before you buy it and continuing as you live in it.

Home equity is the portion of your home that you own outright. If you purchased your home with cash or have fully paid off your mortgage, you have 100 percent equity in your home. Otherwise, your home equity is calculated by subtracting your mortgage balance from your home’s current market value.

If you’re considering taking out a home equity loan or a home equity line of credit (HELOC), it’s important to know how much equity you have. Lenders determine borrowing amounts based on your equity, and generally, the more equity you have, the more money you can borrow.

Building home equity is crucial for several reasons. “It can be a reliable way to create wealth and help you maintain the home while living there,” says Linda Bell, senior writer for Bankrate’s Home Lending team.

Building equity in a property means:

  • Access to Funds: You can borrow against your home equity for various purposes. The most common ways to do this are through home equity loans and home equity lines of credit (HELOCs), typically available once you have a 15 to 20 percent equity stake. With a home equity loan, you receive all funds at once and start repaying over a period of up to 30 years. With a HELOC, you have a draw period (often five to 10 years) to withdraw the needed cash and make interest-only payments, followed by a repayment period (typically 10 to 20 years) to pay back both interest and principal.
  • Profit Potential on Sale: You are more likely to make a profit when you sell your home, even if you still owe on your mortgage. Building equity increases the chance of selling the property for more than you owe, even if the market declines. You can use the profits to purchase another home, pay off debt, or invest elsewhere.
  • Long-Term Wealth Creation: Building home equity can enhance your net worth over time, especially if you bought your home when the market favored buyers. A home is one of the few types of collateral that can appreciate in value (unlike cars, which depreciate). It can also serve as a source of wealth for your descendants.

According to Bankrate’s Home Affordability Survey:

  • 47% of prospective homeowners say high home prices are preventing them from buying.
  • The survey also reveals that 44% of aspiring homeowners are willing to downsize their living space for more affordable housing, and 34% are open to moving out of state or purchasing a fixer-upper.
  • In the first quarter of 2024, homeowners held a record $11 trillion in tappable home equity.
  • During this period, 45.8% of mortgaged homes were considered equity-rich.
  • Additionally, 91% of homeowners view their home as more of a valuable investment than a financial burden.
  • Finally, 68% of adults expect home prices in their local area to rise in the coming year.

There are several strategies to build equity in your home more quickly. These methods generally involve increasing your property’s value, reducing your mortgage debt, or a combination of both. Here are a few options available to homeowners:

Building equity begins the moment you make your down payment. Home equity represents the portion of your home that you own outright. The more cash you contribute toward the purchase, the larger your ownership stake.

The portion of the home you finance is technically owned by the bank. While it’s possible to buy a house with a down payment as low as 3 percent or even zero percent, a larger down payment instantly increases your home equity.

When determining your down payment, consider how much savings you’ll have left after closing. Keeping little to no cash reserves can make it difficult to handle financial emergencies and cover your monthly mortgage payments. Additionally, account for home maintenance costs, which typically amount to about 1 percent of the home’s value in the first year.

If you can put down at least 20 percent on the home purchase, you’ll avoid paying private mortgage insurance (PMI) each month. PMI is an additional surcharge built into your mortgage payment — a burden you don’t need. Avoiding PMI (or MIP if you have a government-backed loan) can free up funds each month, allowing you to allocate more towards your mortgage principal, thereby increasing your home equity more quickly.

When taking out a mortgage, your lender might offer to roll closing costs into the loan itself. While tempting, as these upfront expenses can be significant, potentially up to 5 percent of your loan, it increases the monthly amount you owe (the loan principal plus interest).

Paying closing costs and upfront fees immediately, if financially feasible, is a more economical choice. It boosts your equity by allocating more of your payments to the loan principal, thereby keeping the principal (and interest charged on it) smaller. This approach applies not only to initial mortgages but also to mortgage refinancing, which similarly involves closing costs and fees.

Home renovations can enhance a property’s value and, consequently, your equity. However, it’s essential to recognize that you may not recoup the full amount invested in these projects. Certain renovations yield a higher return on investment than others.

For instance, according to Remodeling’s 2024 Cost vs Value report, an upscale bathroom remodel offers just over a 45 percent return on investment, while a classic wood deck recoups nearly 83 percent of its cost. The most cost-effective project? Replacing the garage door, which provides a remarkable 194 percent return at resale.

Before embarking on a renovation, conduct thorough research or seek advice from a real estate agent or home professional to identify improvements that offer the best returns. The objective is to avoid overspending on renovations that do not significantly increase your home’s value. A professional can assist in selecting projects and details—such as finishes, features, and appliances—that offer the most reliable payoff. Sometimes, simplicity is key: While a minor kitchen remodel yields a 96 percent return on investment, a major remodel only offers 50 percent.

Regular maintenance also plays a crucial role in preserving and enhancing your home’s value and equity.

“Tackling minor issues promptly can prevent them from escalating into major, costly problems later on,” explains Bell. “A cracked foundation or leaky roof can quickly become significant headaches. It’s vital to maintain your property’s condition. By doing so, you not only preserve its functionality while residing in the home but also enhance its appeal to potential buyers when it’s time to sell.”

Many mortgages follow an amortization schedule, where payments are made in installments over a fixed period until the loan is fully repaid. As you chip away at the mortgage, your equity stake grows. Initially, a significant portion of each payment covers interest, but over time, more of it goes toward reducing the principal balance.

However, making additional payments toward the principal each month accelerates the accumulation of home equity by reducing the overall debt owed. If you have the financial flexibility, consider contacting your loan servicer to inquire about making extra payments and ensure they are allocated toward the principal.

Here are some strategies to expedite mortgage payoff:

  • Switch to biweekly payments: Divide your monthly mortgage payment in half and remit each portion every two weeks. This results in an additional payment per year, shortening the loan term and lowering interest costs.
  • Increase monthly payments: Evaluate your budget to determine an extra amount you can comfortably afford to allocate to your mortgage each month. For instance, if you recently paid off a car loan, redirect the freed-up funds toward your mortgage.
  • Utilize windfall funds: Whenever you receive unexpected funds like a tax refund, work bonus, or cash gift, consider applying these windfall amounts toward your mortgage principal.

Opting for a shorter loan term offers two primary advantages: typically lower interest rates and a higher portion of your monthly payment allocated towards the principal. By selecting a 15-year mortgage initially, you accelerate equity growth compared to a 30-year mortgage due to quicker debt repayment. If you’re already in a mortgage, refinancing into a shorter-term loan is an option.

However, there’s a caveat: shorter loan terms come with higher monthly payments. Ensure your budget can accommodate these increased payments before committing to a shorter-term loan or refinancing.

Additionally, securing approval for a shorter loan may pose a challenge. To qualify, you’ll generally need a higher income, superior credit score, and lower debt-to-income ratio compared to traditional 30-year mortgages.

Local housing markets are subject to change, impacting your home’s value over time. When demand increases and property prices rise in your neighborhood, your home’s value follows suit. Conversely, during market downturns, your equity may diminish.

While you can’t control market fluctuations or economic conditions entirely, you can mitigate risks to some extent. Maintaining your home’s condition is paramount. Avoid excessive or frequent tapping into your equity. When you do borrow against it, ensure the funds are used to improve the home or bolster your financial position by paying off high-interest debts.

To gauge your home’s value, utilize online price estimators or seek a professional appraisal. Bankrate’s online home equity loan calculator is a useful tool for assessing your equity’s value.

8. Avoid a cash-out refi

If you’re considering refinancing your mortgage, opt for a rate-and-term refinance instead of a cash-out refinance. With a cash-out refinance, you’re essentially increasing your mortgage debt to receive a lump sum of cash based on your home equity. This action diminishes your ownership stake in the property by borrowing against it, contrary to the goal of building equity.

While a cash-out refinance can have its merits, it’s counterproductive if your aim is to enhance equity. Stick to a rate-and-term refinance, which may offer benefits like lower interest rates or shorter loan terms while preserving your ownership stake in the property.

While your home equity reflects the magnitude of your mortgage, it’s also influenced by economic factors such as property values and the state of the housing market. In 2024, elevated mortgage rates, soaring home prices, and limited inventory will remain key drivers in the housing market.

During the pandemic, home prices surged due to robust demand and historically low interest rates. Despite interest rates sharply rising since 2022, home prices have continued their upward trajectory in 2024. In March, the median price of existing homes rose by 4.8 percent compared to the previous year, fueled by strong demand outpacing available inventory.

While this poses challenges for prospective homebuyers, it’s advantageous for homeowners. As home prices increase, so does the value of homeowners’ equity. According to CoreLogic’s Homeowner Equity Insights, homeowners with mortgages saw an 8.6 percent increase in equity in the fourth quarter of 2023 compared to the same period in 2022.

Looking ahead, the Federal Reserve, which indirectly influences mortgage rates through its monetary policy, has not ruled out an interest rate cut in 2024. While this could alleviate affordability concerns, it’s unlikely to significantly boost housing inventory. Many homeowners may be hesitant to sell their homes and lose their low-interest mortgages, further constraining supply.

Given the limited inventory, substantial declines in home values are improbable. Home prices are expected to remain elevated, leading to continued appreciation in residential real estate and homeowners’ equity stakes.

In recent times, many homeowners are leveraging their equity to access cash for home improvements or debt consolidation. According to TransUnion’s latest data, the number of active home equity accounts increased by 5 percent in the fourth quarter of 2023. Surprisingly, home equity loan originations surpassed pre-pandemic levels, while HELOC originations remained stable.

“Home equity loan rates and HELOC rates are appealing because they typically offer lower interest rates compared to personal loans or credit cards,” notes Bell.

However, she cautions that by securing these lower rates, homeowners are essentially using their homes as collateral. “It’s crucial to ensure you can handle the additional debt burden, as failure to keep up with payments could result in losing your home,” she emphasizes. Additionally, if home values decline after tapping into your equity, you could quickly transition from having positive equity to negative equity, owing more than your property’s value.

Bell advises homeowners to carefully consider the pros and cons of accessing their home equity before proceeding. It’s also essential to assess how quickly you can rebuild your equity. Whether it’s driven by a thriving market or paying off a mortgage, a substantial equity stake offers various benefits for homeowners, both in the long term and for immediate financial goals.