Home equity is the market value of your home minus the dollar amount still owed on your mortgage. Home equity is not the same as the cash you will receive after the sale of a home. When a home is sold, transactional costs need to be considered. These may include real estate commissions, possible closing costs, and the price of repairs which the purchaser may negotiate in the purchase contract. These transactional costs are not considered to be part of your home equity. This fact needs to be kept in mind if you are considering cashing out your home equity and selling your home.

For many families, their home equity represents a high percentage of their personal wealth. We naturally ask then, how can we add equity to our home? There are several ways to do this.
The easiest method may be to just keep living in in your home. If you own a home in an area where home prices are appreciating, then you will naturally gain equity as the value of your home increases. At the same time you will be paying down your mortgage and reducing the liability on your investment. This latter fact assumes that you have a mortgage that is amortizing, and not one of the specialty options available, such as interest only loans or reverse mortgages.

Another simple way to gain home equity, and perhaps the most effective at times, is to buy your home well below market value. In tough economic times, homes often go for below market value as desperate sellers reduce prices, and banks try to unload foreclosed upon homes. If you buy right, you enter your home with equity built in, making future appreciation all the more sweet.

You can also gain equity by putting in what is termed "sweat equity". While more challenging and time consuming, this can be quite effective. Many homeowners have been able to purchase homes in need of repair for much lower prices than homes that may be in better condition. Once the hard work and time are put in to have repairs and upgrades made, these homes can be valued at a much higher price per square foot. Some types of additions or upgrades to certain rooms can also add equity. It is a good idea to consult a realtor or appraiser to see what types of major changes would add equity to your home.