Home equity is the value of your house minus the amount you owe on your mortgage or home loan. When you first buy a house, your home equity is the same as your down payment. If you buy a house for $250,000 with a down payment of $25,000, you begin with $25,000 in home equity. After you buy a house, the value of your home equity can change and hopefully it will increase.
How your home equity can increase
One way you can increase your home equity is by making mortgage payments. Part of this payment goes towards paying down the principal, which is the amount of money you owe for your home.
In the early years of homeownership, more of your monthly bill goes to paying for the interest than paying down the principal. That means your mortgage payments are likely to make only modest contributions to your home equity. You may be able to build equity faster by paying more than you owe each month, by making an extra mortgage payment each year, or by moving to bi-weekly mortgage payments. Making additional payments also helps save on interest because you are paying off your loan faster.