How to Build Home Equity

Okay, to make this clear right at the start: If you are a homeowner, home equity is most likely your most valuable asset that arises from your homeownership. Especially as you grow older, home equity can come in extremely handy, so it pays to make sure you understand what it is.

The short answer to what is home equity is that it is the homeowner’s interest in a home. Since property value of any home typically increases over time, as improvements are being made, a place becomes more commercially active and you pay down your mortgage, home equity tends to increase as well. So, home equity is the bit of the house that is one hundred percent yours and that you fully benefit from, including increases in its value.

To find out what your home equity is, first take the current value of your home. Then, subtract from that value everything you owe on mortgages or liens, including secondary mortgages that you maybe took out after purchasing the house. In other words, your home equity is the part of your home that you already paid for. If you already paid 30 percent of your home’s total value and the rest is still locked up in loans, then your home equity is the value equivalent to 30 percent of your house’s worth.

Now, this does not mean that you do not “own” the rest of your house in a legal sense. You always own 100 percent of your house, but you only have home equity in the part that you already paid for. The part you have not yet paid for is still considered collateral for the loan you took out to afford your house in the first place.

The great thing is, though, that as your home becomes more valuable, the value of your debt remains the same. This is because of the value of your home changes with market forces, while the amount of money that you owe is always fixed at an absolute dollar value that does not change with the market.

To increase home equity, you can pay down your loan. But it can also increase if your area is being improved through things such as infrastructure projects.