Here's What Happens When You Build Equity in Your Home

The upside of buying a home rather than renting one is getting to build equity in a property you own. Home equity is defined as the difference between your home's market value and the amount left on your mortgage loan. If your home is valued at $500,000 and you owe $150,000 on your mortgage, you're left with $350,000 in equity.

As of the end of 2022, U.S. homeowners had about $270,000 in equity on average, says CoreLogic. But how exactly does having home equity help you? That's an important thing to know.

Having equity buys you more borrowing options

Many people who need to borrow money turn to personal loans, which can be a cost-effective means of accessing cash. But if you have home equity, you can also borrow against it in the form of a home equity loan or line of credit. In that case, your home is used as collateral for your loan or line of credit, which means you may have an easier time qualifying to borrow, especially if your credit score is not only okay but great.

You can also use your home equity to your advantage when you do a cash-out refinance. When you go this route, you borrow more than your remaining mortgage balance and get the remaining funds as cash that you can spend any way you want. But the more equity you have, the more leeway you get to borrow beyond your remaining mortgage balance.

Having equity could lead to more money for you when you sell your home

Not everyone who sells a home does so at a profit. But the more equity you have in your home, the more money you might walk away with in the course of a sale.

Let's say your home could sell for $500,000 and you have $350,000 worth of equity. Let's also assume you can sell your home yourself and don't owe a real estate agent's commission. In that case, you stand to walk away with $350,000 after your mortgage balance is paid off. If you only had $200,000 in equity in this case, you'd only walk away with $200,000 following your sale.

How to build home equity

In many cases, you can build home equity simply by staying in your home for many years. That's because property values have a tendency to rise over time.

But also, the more you pay down your mortgage, the more home equity you get to build. And if you're eager to build home equity quickly, making extra mortgage payments when you can is a good way to go about it.

All told, having equity in your home gives you options to borrow money when you need to and walk away with money in the course of a sale. So while you don't have to spend your days fixating on how much home equity you have, it's definitely a good thing to be aware of. And you should also know that the more money you put into your mortgage, the more equity you stand to build.