Understanding Home Equity

A home is more than a place to live—it’s a valuable asset that has tremendous potential to affect the financial opportunities available to you, shape your future decisions, and help you build wealth over time. Naturally, then, identifying where you stand can provide a clear snapshot of your family’s monetary health. Check out the basics of home equity, and learn how you can better sow value that you could reap down the road.

What is it?

In a nutshell, home equity is the difference between the market value of your home and the amount you owe on your mortgage. Each payment you make reduces the principal balance of your loan, thereby increasing your held value in the property. So if it is currently worth $400,000 and you owe $250,000 on your mortgage, your equity is $150,000. This figure represents the portion of your home that you truly own.

The calculation

As you can see, the equation for assessing your home equity is simple, but determining the relevant numbers may take some legwork. You’ll first need to identify what your home is worth. For a simple and easy solution, you can utilize a value estimator—such as realtor.com’s RealValue™ tool—and then compare that to your mortgage balance on your latest statement. This will give you a rough idea of your equity, which you can use to gauge how you may be able to tap into it or weigh the benefits of selling soon.

That said, you should acquire a more accurate number before making major financial decisions based on this asset, such as taking out an equity-based loan or retiring. This requires determining your home’s fair market value. Doing so is more of an art than a science since it depends on both objective qualities, like your home’s square footage and number of bathrooms, and subjective ones, like how desirable your neighborhood is. Specialists of this art form include home appraisers and real estate agents, who can run a comparative market analysis (CMA) to estimate your property’s worth based on recent sales in the area.

However, building equity doesn’t simply equate to paying down your mortgage. After all, your home’s value is not a fixed figure but a continuously fluid one. It may go up, for example, due to household improvements or limited available properties in your zip code. Conversely, it may diminish because of increased traffic noise or serious damage like roof leaks. This makes it wise to calculate your equity periodically to stay in tune with your financial situation, even if you aren’t presently preparing to sell.

The path to boosting equity

Because your home equity depends on two figures—your mortgage balance and the property’s fair market value—the key to enhancing it is taking steps to both decrease the former and increase the latter. Here are the two major approaches to accelerating your equity growth.

Making extra mortgage payments
Paying more than your minimum amount due or making additional lump-sum payments can cut down your principal at a quicker pace. You could also refinance to a shorter-term mortgage, such as by switching from a thirty-year term to a fifteen-year term. This will generally result in higher monthly payments, but it will slash your total interest paid over time and may ultimately expedite your route to 100 percent equity. Talk to your mortgage broker or a financial advisor for personalized guidance.

Investing in enhancements
While many factors affecting your home’s worth may be out of your control, you can still make a significant difference by investing in certain improvements. According to Zonda’s 2024 Cost vs. Value Report, some of the greatest ROI investments include installing a new garage or entryway door, upgrading to manufactured stone siding, and undergoing a moderate kitchen remodel. Consider discussing your options with a real estate agent to ensure that you make appealing choices that augment your home’s desirability. Additionally, stay on top of regular maintenance and conduct timely repairs to preserve your home and prevent value depreciation.

The potential of equity

As a major financial asset, your home equity can be accessed and leveraged in numerous ways. For one, when you sell your home, it will translate into profit, which you can apply toward your next residence. Many retirees also choose to downsize and put the leftover dollars into other investments.

But you don’t have to wait to sell to take advantage of your equity. For example, if you’re in need of cash, you can borrow against it through a home equity loan or home equity line of credit (HELOC). The resulting funds can be used for any expense you like, such as home improvements or education. Just be sure to avoid overborrowing to safeguard your property.

As a homeowner, nurturing and managing your home equity is an essential component of financial planning. Whether you’re considering selling your home, planning renovations, or simply exploring your investment opportunities, having a clear understanding of this asset can empower you to make wise decisions.