The Importance of Home Equity and How to Build It

In Q1 1963, the average price for a home was $19,300. By Q1 2025, the average home price was a whopping $503,800. Even without factoring in upgrades like garages, spa baths, or added square footage, that’s an annual price gain of $7,814.52.

Home prices help determine equity for homeowners, and the amount of appreciation or depreciation varies greatly based on any given year’s economy and local housing market conditions. With the exception of a few outliers, like the Great Recession of 2008 when home values plummeted, and the Covid-19 pandemic when home prices began soaring to unprecedented levels, homeowners can count on building equity simply by remaining in their homes and letting time build it for them.

Equity is the difference between the current market value of a home and what is owed to the mortgage lender or other lien holders. In simple terms, if you buy a home for $500,000 with a down payment of $100,000, you have $100,000 in equity already.

The advantages of home ownership

There are two huge advantages to owning a home and building equity:

1. Homeownership is a major hedge against inflation. As the cost of housing rises, your mortgage payment (if fixed-rate) stays the same—while others entering the market face higher prices and larger loan payments. This price stability allows you to stretch your budget more effectively over time. Instead of putting more toward housing costs, you can use that financial breathing room to invest, make home improvements, or save for your children’s education.

2. Building equity builds wealth. Thanks to the housing shortage and increased demand for homes, home prices have soared since 2020. By 2025, homeowners’ net worth was 43 times greater than that of renters—an average $430,000 compared to $10,000. Those fortunate enough to own homes in sought-after areas saw their net worth skyrocket without lifting a finger over the last five years.

Net worth is the difference in the value between assets and liabilities. If you don’t own an asset like a home, it’s much more challenging to overcome liabilities and to build wealth. Renters found that out the hard way recently. As home supplies tightened following the pandemic of 2020, rents rose as fast as home prices, putting renters in the disadvantageous position of paying as much as 50% of their monthly income on rent. By comparison, the Department of Urban Housing and Development suggests that a homeowner or renter should strive to spend no more than 30% of their gross income on housing.

That’s easier said than done for many households, which is why the government offers a variety of support systems to foster home ownership. According to White House archives, the government believes the “American Dream” of home ownership sets the nation apart from others in the world with the ability to own and pass down property to descendants. From the days of Abraham Lincoln and the Homestead Act, when qualifying citizens were given 160 acres of government land to cultivate, home ownership has helped build personal wealth and has had a noticeably stabilizing effect on communities. Homeowners work to protect their property values as well as support the local community in its endeavors to improve the lives of citizens. Among the actions federal and local governments take to promote homeownership are the following:

1.    More favorable interest rates on loans for owner-occupants. As long as borrowers follow federal guidelines to qualify for a mortgage based on their credit histories, size of the loan, and terms, they’ll receive more favorable rates than someone with poor credit.

2.    More favorable terms for owner-occupants. Owner-occupant borrowers can borrow mortgage money for as long as 30 years at a fixed rate, regardless of how mortgage interest rates fluctuate over the years. They can also borrow additional money for home improvements either through a purchase/home improvement loan, equity lines of credit, or remodeling loan. In many cases, borrowers can qualify for low or no-down-payment loans.

3.    Homestead and income tax exemptions. Homesteads (owner-occupied properties) are property taxed at lower rates than investment and commercial properties at the local level. In addition, income tax allows mortgage interest deductions and some home office deductions that meet federal criteria.

4.    Government agencies guarantee conforming mortgage loans. Conforming loans are a type of conventional loan that must meet Federal Housing Finance Agency guidelines designed to minimize borrower default.

5.    Government-sponsored entities replenish conventional mortgage loan money to banks. A conventional loan is one that is not guaranteed by the FHFA but meets the same borrowing standards for loans. When the borrower’s credit history, down payment and income meet these guidelines, the loans become eligible for purchase by government-sponsored entities Fannie Mae and Freddie Mac, which package them into mortgage-backed securities.

6.    Federal guidelines assist borrowers in high-cost areas. Conforming and conventional loan limits are higher in designated high-cost areas to make qualifying easier for borrowers.

How to build equity

There are three indisputable ways to build equity: time, money, and care.

Time. Closing or borrowing costs are significant, as much as 2-5% of the loan amount, or $8,000 to $20,000 on a $400,000 loan. It takes time to recapture that money so that you have enough equity to sell at a profit and buy a better home. The five-year rule suggests that the typical homeowner will build enough equity in that timeframe. The longer you remain in your home, the more equity you’ll build through market appreciation and paying your mortgage.

Money. The down payment you make shows the lender how seriously you’re taking homeownership. They want you to have some “skin in the game.” A down payment of 20% or more of the purchase price of the home is enough to help you qualify for a conventional loan. It’s also the fastest way to build equity.

Some government-backed loans such as FHA require 3.5% of the purchase price as a down payment, but you’ll have to pay an upfront mortgage insurance premium (MIP) on the borrowed amount (1.75%) as well as an annual premium (0.55%) for the duration of the loan. While your monthly payment is much higher with MIP, you can at least get into a home and start building equity sooner. Conventional loans can be obtained for as little as 3%, but you’ll have to pay private mortgage insurance until your equity reaches 20% or 22%. The VA and USDA don’t require down payments or MIP.

You can build additional equity by adding money to your monthly payments to pay down your mortgage faster. Once your loan is eligible for PMI to be eliminated, you’ll have even more money to put toward your mortgage.

Care. Homes require a lot of short-term (lawn mowing, cleaning) and long-term (home improvements) care. Sooner or later, you’ll have to perform repairs and renovations. These are necessary to maintain your home’s structural integrity, not to mention market value. What you want to do is take care of issues as soon as they arise.

When it comes time to sell your home, you’ll receive the top dollar possible when your home is in excellent condition. But, if your home has been allowed to deteriorate, homebuyers will pass it up or give you a low-ball offer at best.