Building Equity: What It Means and How to Do It

What Is Home Equity?

Home equity is the portion of your home that you truly own — the difference between your home's current market value and the outstanding balance on your mortgage. To be clear, it is not the percentage of the house that you own. Legally, you own your whole house; but the question is, how much wealth have you built up after taking the remainder of the mortgage out of the equation?

For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. Home equity builds as you pay down your mortgage and as your property's value appreciates over time.

Why Building Equity Matters for Homeowners

Building equity is one of the biggest financial advantages of homeownership. Every mortgage payment you make — and every dollar your home gains in value — increases your equity stake. That growing equity boosts your net worth. Homeowners can tap into their equity for major expenses like home improvements, debt consolidation or education costs. Additionally, when you sell your home, the equity you've built directly affects how much profit you’ll walk away with. Simply put, the more equity you build, the stronger your financial future.

How Home Equity Grows Over Time

Home equity grows in two primary ways: paying down your mortgage and seeing your home's market value rise. Each mortgage payment you make chips away at your loan balance, steadily increasing the amount of your home you own outright. At the same time, if the real estate market is strong and your property appreciates, the gap between your home’s value and your mortgage widens, giving you even more equity. Strategic actions like making extra payments, refinancing to a shorter loan term or investing in smart home upgrades can speed up this growth even further.

Top Ways to Build Equity in Your Home

Building equity is not something that happens by accident — it’s the result of long-term consistency, intentional financial decisions and smart homeownership strategies. Whether you’re buying your first home or you’ve owned for years, there are proven ways to boost the value you own. Here are the top strategies to help you maximize your home equity and strengthen your financial foundation.

Make a Larger Down Payment

One of the fastest ways to build instant equity is by making a larger down payment at the time of purchase. A down payment of 20% or more immediately increases the portion of the home you own outright, reduces your loan amount and eliminates the cost of private mortgage insurance (PMI). Even if you can’t reach 20%, every extra dollar you put down up front accelerates your equity growth and lowers your future monthly payments.

Pay More Toward Your Mortgage Principal

Every additional payment toward your mortgage principal directly boosts your equity. Small moves like rounding up your monthly payment, making biweekly payments instead of monthly ones or applying extra cash (like tax refunds or bonuses) toward your principal can make a huge difference over time. The key is consistency — even small extra amounts compound into significant equity gains over the life of your loan.

Refinance to a Shorter Loan Term

Refinancing from a 30-year mortgage to a 15- or 20-year loan is a powerful way to build equity faster. Shorter loan terms come with higher monthly payments, but more of each payment goes directly toward paying down your principal instead of interest. Plus, shorter-term loans often offer lower interest rates, meaning even more of your money works for you instead of the lender.

Increase Your Home’s Market Value

Raising your property’s value is another effective way to grow your equity. Home improvements that add real value — such as kitchen renovations, bathroom upgrades, replacing windows, adding other energy-efficient features or enhancing curb appeal — can boost your home’s appraised worth. It’s important to choose projects wisely; many upgrades yield a negative return on investment unless you are a handyman extraordinaire and are able to do the work yourself. Prioritize improvements that you will use and enjoy in the meantime so you can reap their value yourself and will appeal to future buyers by enhancing your home’s appeal, functionality and livability.

Stay in Your Home Longer

Sometimes, the best thing you can do for your equity is simply to stay put. As you continue making mortgage payments and the market naturally appreciates over time, your equity grows without any extra effort. Selling too soon can eat into your profits with transaction costs and missed appreciation opportunities. Patience often leads to bigger gains, especially in strong real estate markets.

How to Use Home Equity Once You've Built It

Once you’ve built substantial equity in your home, it becomes a powerful financial tool you can tap into when needed. Home equity can be accessed through options like a home equity loan, a home equity line of credit (HELOC) or a cash-out refinance. Many homeowners use their equity to fund major expenses like home renovations, college tuition, debt consolidation or even to invest in additional real estate. 

Risks to Avoid When Borrowing Against Home Equity

Borrowing against your home equity carries significant risks if not handled carefully. First and foremost, your home acts as collateral. This means that failure to repay can result in foreclosure. Taking on too much additional debt can also lower your credit score, strain your monthly budget and limit your future financial flexibility. Another risk is market fluctuation: if home values drop and you’ve heavily borrowed against your equity, you could end up owing more than your home is worth (this is commonly known as being underwater or upside down on your mortgage). It’s essential to borrow conservatively, plan for realistic repayment and reserve home equity borrowing for investments or expenses that genuinely improve your financial health.

Building Equity Builds Wealth

Building home equity is about creating a source of wealth that can open doors for your future. With every payment you make and every smart upgrade you complete, you’re steadily shifting your financial footing from debt to a strong financial foundation. Whether you eventually use that equity for major life goals, a new investment or simply enjoy the security it provides, growing your home equity is one of the smartest long-term moves you can make as a homeowner. The earlier and more intentionally you focus on building equity, the stronger your financial future will be.

Partner with Ideal Credit Union to Build Your Financial Future

At Ideal Credit Union, we’re committed to helping you make the most of your homeownership journey. Whether you’re buying your first home, refinancing or exploring ways to tap into your home equity, our expert team is here to guide you every step of the way. With competitive mortgage options, personalized financial advice and a deep knowledge of our local Minnesota market, Ideal Credit Union is the trusted partner you need to build lasting wealth and start living your Ideal Life. 

Connect with us today to get started!