Home equity is one of the most powerful wealth-building tools available to homeowners. Understanding how it works—and how to grow it faster—can put you on a path to greater financial security.
What Is Home Equity?
For example, if your home is worth $400,000 and you owe $250,000 on your mortgage, you have $150,000 in equity.
How Equity Grows
Your equity increases in three ways:
Paying Down Your Mortgage
Each monthly payment reduces your loan balance. In the early years, most of your payment goes to interest, but over time, more goes to principal.
Home Value Appreciation
As your local market grows, your home's value typically increases. The national average is 3-5% per year, but this varies significantly by location.
Home Improvements
Strategic renovations can increase your home's value more than their cost, adding to your equity.
Strategies to Build Equity Faster
1. Make Extra Principal Payments
Even small additional payments can have a big impact:
Example: $300,000 loan at 6.5% for 30 years
2. Make Biweekly Payments
Instead of 12 monthly payments, make 26 half-payments. This equals 13 full payments per year—one extra payment without feeling the pinch.
3. Refinance to a Shorter Term
A 15-year mortgage has higher monthly payments but:
- Lower interest rate (typically 0.5-0.75% less)
- Much more goes to principal each month
- You own your home free and clear in half the time
$1,996/month on $300K
$418K total interest
$2,572/month on $300K
$163K total interest
4. Avoid Cash-Out Refinancing Unless Strategic
While there are good reasons to tap equity (see our HELOC vs. Cash-Out guide), doing so repeatedly will keep you from building wealth.
5. Make High-ROI Improvements
Not all renovations add value. Focus on projects that return more than their cost:
- Minor kitchen updates (not full remodels)
- Curb appeal improvements
- Energy efficiency upgrades
- Adding usable living space
How to Track Your Equity
Use online estimates (Zillow, Redfin) as a starting point, or get a professional appraisal for accuracy.
Look at your monthly statement or log into your servicer's website.
Home value minus mortgage balance = your equity.
Track changes over time to see your wealth growing.
Using Your Equity Wisely
Good Uses of Equity
- Home improvements that add value
- Emergency fund backup
- Consolidating high-interest debt
- Education expenses
- Investment properties
Risky Uses of Equity
- Vacations or luxury purchases
- Covering ongoing expenses
- Speculative investments
- Bailing out failing businesses
- Lifestyle inflation
Track Your Home Equity Growth with NestorAI
NestorAI helps you monitor and grow your home equity:
- Track your home's estimated value over time
- Monitor your mortgage paydown progress
- Calculate the impact of extra payments
- Log improvements and their potential value impact