How to Use Home Equity to Build Wealth

For many people, buying a home is one of the most significant financial decisions they’ll ever make. Over time, that decision can build home equity, which may support financial stability and long-term opportunity under the right conditions.

In this article, we’ll explain how home equity grows, why it matters to your overall financial picture, and the conditions under which it can support wealth over time. We’ll also discuss when using equity makes sense, and how homeownership can contribute to long-term and generational opportunity.

Table of Contents

1. Is home equity an asset?
2. How home equity builds wealth over time
   1. 1. Appreciation increases the value of your asset
   2. 2. Mortgage payments increase your ownership stake
      1. Example
   3. 3. Stable housing costs support your financial growth
3. Growing and protecting your home equity
   1. Improve your home with value-adding upgrades
   2. Protect your equity through ongoing maintenance
   3. Avoid financial decisions that put your equity at risk
4. When using home equity may create opportunities
5. How home equity supports generational wealth
   1. Passing on a home with little or no mortgage
   2. Providing flexibility and opportunity for heirs
   3. Reinforcing financial security across generations
6. Best practices for using home equity responsibly
7. Building wealth through steady, intentional homeownership

Is home equity an asset?

When you buy a home, the property itself is an asset. Your home equity is simply the portion of the home’s value that you own free and clear of any debt.

To put this in perspective, assets are almost anything you own that has value. This can include a house, a car, or even cash in a bank account. In contrast, liabilities represent money you owe to others, such as a mortgage, a car loan, or a credit card balance.

The difference between the two, assets minus liabilities, is your equity or net worth. As you work to build wealth, the goal is to grow the value of what you own while reducing what you owe. In other words, you’re trying to increase how much of your assets you own outright.

For a home, equity is calculated as the home’s market value minus any debt connected to the property. This can include the remaining mortgage balance, other home loans, and even the amount you can borrow on a home equity line of credit (HELOC). The basic formula looks like this:

Home Equity = Property Market Value – Home Loan Obligations

Because a home is often one of the most valuable assets people own, home equity may represent a meaningful portion of an individual’s overall net worth once any debt used to finance it is repaid. 

Over time, equity grows through two forces working together. Homes tend to appreciate over long periods, while loan balances decline as they’re paid down.

What makes home equity unique compared to other assets is that it serves two purposes at once. A home provides essential housing while also holding financial value, a combination that can support stability today and create opportunity across generations.

How home equity builds wealth over time

Home equity usually doesn’t grow because of a single event. Instead, it builds gradually through several forces that work together over long periods. For many homeowners, this steady growth serves as the foundation for how homeownership can build wealth.

These forces don’t require complex strategies or constant decisions. They happen through owning the home, making regular payments, and living with predictable housing costs. Together, they form the core of how equity can grow for many families.

1. Appreciation increases the value of your asset

Home appreciation increases a property’s market value over time. When the value of the home rises, the asset becomes more valuable, even if nothing else changes. That increase happens simply by owning the home.

Appreciation doesn’t require making any extra payments on your existing home loans. As long as you own the home, changes in the overall market value also affect the value of your home. Over the long term, this could lead to increased home equity.

2. Mortgage payments increase your ownership stake

Each mortgage payment reduces the amount you owe on the home. Over time, this shifts more of the home’s value from the lender to you. That growing ownership increases home equity.

Early in a loan, a larger portion of each payment goes toward interest. As the balance declines, more of each payment applies to principal. This gradual shift is known as amortization.

Amortization works the same way regardless of loan length. To see how this works, let’s look at a simple example using a $3,000 loan with a short 12-month term. While the loan balance and term are smaller than a home mortgage, the amortization process works exactly the same.

Example: $3,000 amortizing loan with a 12-month term and 7% interest rate

Date	Payment	Estimated interest	Estimated principal	Estimated balance
12/16/2025				$ 3,000.00
1/16/2026	$259.58	$17.50	$242.08	$ 2,757.92
2/16/2026	$259.58	$16.09	$243.49	$ 2,514.43
3/16/2026	$259.58	$14.67	$244.91	$ 2,269.51
4/16/2026	$259.58	$13.24	$246.34	$ 2,023.17
5/16/2026	$259.58	$11.80	$247.78	$ 1,775.39
6/16/2026	$259.58	$10.36	$249.22	$ 1,526.17
7/16/2026	$259.58	$8.90	$250.68	$ 1,275.49
8/16/2026	$259.58	$7.44	$252.14	$ 1,023.35
9/16/2026	$259.58	$5.97	$253.61	$ 769.74
10/16/2026	$259.58	$4.49	$255.09	$ 514.65
11/16/2026	$259.58	$3.00	$256.58	$ 258.07
12/16/2026	$259.58	$1.51	$258.07	$ 0

As the table shows, the amount applied to principal increases over time, while interest steadily declines. The outstanding balance shrinks faster toward the end of the loan, even though the payment stays the same.

The same process applies to a mortgage. Because the loan balance declines over time, your net worth increases even if the home’s market value stays the same. This is one of the most consistent ways home equity builds wealth over the long term through ownership.

3. Stable housing costs support your financial growth

With a fixed-rate mortgage and a long loan term, the principal and interest (P&I) portion of your mortgage payment remains the same over time, even as the overall cost of living increases. That stability can make long-term budgeting and planning easier.

Some housing costs can still change. Property taxes, homeowners’ insurance, HOA fees, and maintenance costs may rise over time. Even so, a significant portion of the mortgage payment, principal and interest, stays stable throughout the loan term.

Whether you rent or own, housing typically takes up a significant share of your budget. Recent data from the U.S. Census Bureau shows that while housing costs are rising for everyone, renters generally spend a higher percentage of their income on housing than homeowners with a mortgage.

Recent Census data shows the median percentage of income spent on housing costs in 2024 was:

• Homeowners with a mortgage: 21.4%
• Renters: 31%

Housing costs, as defined by the Census, include mortgage payments, insurance, taxes, utilities, and fees such as HOA or condo fees for homeowners with a mortgage. For renters, it includes rent plus utilities.

According to the Census, in 2024, about 65.3% of households owned a home, and roughly 59.7% of those homeowners had a mortgage. 

This means a meaningful share of homeowners had eliminated one of their most significant housing expenses entirely. For those households, housing costs are even more predictable over time.

Growing and protecting your home equity

While home equity grows naturally over time, it also needs to be protected. Homeowners can take intentional steps to increase a home’s value and safeguard the equity they’ve already built. 

Building equity doesn’t necessarily require taking on new debt. Instead, it often comes from maintaining the home, making thoughtful improvements, and avoiding financial choices that weaken long-term stability. Together, these habits support steady, long-term wealth.

Improve your home with value-adding upgrades

When homeowners choose to make improvements, it helps to focus on projects that keep the home in good working order and maintain its appeal over time. The goal shouldn’t be to chase trends, but to support the home’s overall quality and functionality.

A few examples of value-added improvements could include upgrading your home’s exterior or landscaping, updating bathrooms, or making your home more energy-efficient. These types of updates can be a great way to improve both how the home looks and functions.

Because the impact of upgrades can vary by market, it’s still important to be selective. If you’re unsure whether a project is likely to support the home’s value, a real estate professional, licensed appraiser, or experienced contractor can help you think through the decision.

Protect your equity through ongoing maintenance

Routine maintenance plays an important role in protecting home equity. Small issues that go unaddressed can turn into larger, more expensive problems over time. Staying on top of regular upkeep helps preserve the home’s condition.

Ongoing maintenance includes things like servicing your plumbing systems, maintaining your room, painting, and addressing minor issues before they escalate. These types of efforts don’t necessarily increase a home’s value, but they can help prevent value from being lost.

Avoid financial decisions that put your equity at risk

Home equity tends to build gradually, but it can decline much more quickly if financial decisions aren’t made carefully. Choices that increase the amount of debt tied to your home can weaken long-term stability, especially if they stretch your budget.

Repeated cash-out refinancing, taking on more debt than you can comfortably manage, or accepting high payments can reduce your equity and increase financial risk. Over time, these choices can make it harder to handle changes in income, interest rates, or housing markets.

Managing home equity responsibly means keeping a long-term view. Preserving ownership and maintaining manageable payments helps support stable homeownership and long-term wealth building.

When using home equity may create opportunities

Home equity doesn’t have to be borrowed against to build wealth. For many homeowners, the greatest benefit may come from simply owning the home and allowing equity to grow over time. Still, there are situations where some homeowners choose to access equity as part of a broader financial plan.

Using home equity always involves tradeoffs. Borrowing against the home reduces your ownership stake and increases financial risk, so these decisions are best approached carefully and with a long-term perspective.

Common ways homeowners sometimes use home equity include:

• Buying investment property: Some homeowners use equity to help purchase additional real estate. This can expand exposure to housing markets, but it also increases debt and financial risk.
• Starting or expanding a business: Home equity may be used to fund a business venture. While this can support growth, it also ties business risk directly to the home.
• Consolidating high-interest debt: Some homeowners use home equity to pay off higher-interest debt. This may lower monthly payments, but it converts unsecured debt into secured debt against the home.

For many homeowners, borrowing against their home’s equity isn’t required to build wealth. Allowing equity to grow steadily through ownership can be a great approach. 

How home equity supports generational wealth

Home equity can shape more than your own financial picture. Over time, it can create stability, flexibility, and options for future generations. For some families, homeownership may become one of the most meaningful ways wealth is carried forward.

Unlike short-term financial assets, a home can support multiple generations in different ways. Whether it’s passed down, sold, or used to support future goals, home equity can help create opportunity beyond the original owner.

Passing on a home with little or no mortgage

When a home is passed on with little or no remaining debt, it can provide immediate financial relief to heirs. Without a large housing payment, future generations may have more flexibility in how they use their income.

Inheriting a home can also offer stability during major life transitions. It may reduce housing costs, eliminate the need to rent, or provide an asset that can be sold if needed. In some cases, this could create a stronger financial starting point.

This is one reason home equity may play an important role in generational wealth. Ownership that’s built over decades can translate into meaningful support for those who come next.

Providing flexibility and opportunity for heirs

Home equity can give heirs choices, which is often just as valuable as the asset itself. Depending on their circumstances, heirs may choose to live in the home, sell it, or rent it out. That flexibility allows them to align the asset with their financial goals at the time.

Having options can make a meaningful difference during periods of transition. A home can reduce housing costs, provide rental income, or offer liquidity through a sale. Each option gives heirs room to respond to their needs rather than being forced into a single path.

In this way, home equity helps support opportunity across generations. Rather than narrowing options, it can provide financial breathing room and stability when it’s needed most.

Reinforcing financial security across generations

Homeownership can support financial security in ways that extend beyond a single lifetime. A paid-off or low-debt home can reduce housing costs for future generations, freeing up income for other priorities. Over time, that stability can compound.

Lower housing pressure can influence broader outcomes. Families with stable housing often have more flexibility to invest in education, career opportunities, or savings. While outcomes vary, reduced housing strain may create space for stronger long-term financial decisions.

Over the long run, home equity has the potential to help anchor financial security across generations. By reducing ongoing housing costs and providing stability, homeownership can expand opportunity and support a stronger financial foundation for those who come next.

Best practices for using home equity responsibly

Home equity can support long-term wealth, but only when it’s managed thoughtfully. Decisions tied to the home have lasting consequences, so it’s important to approach them with care and a long-term perspective.

Responsible use of home equity often comes down to a few core principles:

• Borrow carefully and only when necessary: Taking on debt against your home should be intentional, not automatic. If you choose to spend some of your equity, it should be tied to clear goals rather than short-term spending.
• Maintain a strong equity cushion: Keeping meaningful equity in the home helps protect against market downturns or unexpected life changes. A strong cushion provides flexibility and reduces financial stress.
• Align borrowing with long-term needs: Because home loans generally have long terms, they make the most sense for long-term purposes, such as renovations. Using them to cover everyday or short-term expenses can create unnecessary financial risk.
• Seek professional guidance when needed: Financial, tax, or real estate professionals can help evaluate the broader impact of equity-related decisions. A second perspective can clarify tradeoffs and uncover potential risks.

Approaching home equity with intention helps protect both current financial stability and future generational wealth.

Building wealth through steady, intentional homeownership

Homeownership can support wealth over time under the right conditions. When a home’s value appreciates, mortgage balances are steadily repaid, and housing costs remain relatively stable, equity can grow alongside other financial goals.

That said, homeownership does not guarantee wealth creation. Outcomes depend on market forces, time, and the financial decisions made along the way. For some households, equity grows meaningfully; for others, it may grow slowly or unevenly.

Actions such as maintaining the home, avoiding excessive debt, and protecting home equity can improve the likelihood of positive outcomes, but they do not eliminate risk.

Viewed this way, homeownership is not a shortcut or a certainty. It is one potential path that, when approached thoughtfully and under the right conditions, can support financial stability and create opportunity over time, including for future generations.