SoFi

There are many reasons to pursue homeownership, from obtaining a yard for your dog to painting the bathroom whatever darn color you want. But one of the biggest financial reasons to own your own home is to start building home equity.

Home equity is considered one of the most common and accessible ways to build wealth over time, thanks in large part to the appreciation of real estate over time. You can even leverage your home equity to take out loans and fund your retirement. But what, exactly, is home equity, and how does it work?

What Is Home Equity?

Home equity is the amount of your home value that you actually own. It’s calculated by subtracting your mortgage balance from the market value of your property. For example, if your home is worth $350,000, and you’ve paid enough toward your down payment and home loan that your mortgage balance is $250,000, you have $100,000 in home equity. (Keep in mind that the $350,000 value might not be what you initially purchase your home for — that figure may have increased over time, which is part of how equity is built!)

Once you have home equity, you can borrow against it. If you sell the home, your equity is the amount of cash you will walk away with (minus any costs associated with the sale).

In short, home equity is pretty great to have. But how is it built?

How to Build Home Equity

Home equity is primarily built in two ways: paying down your mortgage and seeing the value of your home appreciate over time. Both of these can be nudged a bit to help you build equity faster. Here’s how.

Making a Larger Down Payment

Many buyers, especially first-time homebuyers, take advantage of programs that allow small down payments — sometimes as little as 3% of the home purchase price. But when it comes to building equity, a higher down payment could help. The more you put down when you’re first purchasing your house, the more equity you have right out of the gate — and if you put down 20% or more, you’ll be able to avoid the additional cost of private mortgage insurance, commonly called PMI.

When calculating mortgages, you’ll also see that the higher the down payment you can afford, the lower your monthly mortgage bill. That said, substantial down payments can be prohibitive for many buyers, and it may make more sense to get in with a lower down payment and start building equity rather than waiting a long time to save up tens of thousands of dollars.

Paying Off Your Mortgage

If making a larger down payment isn’t possible, you might also be able to speed up your equity earnings — and save money on interest over time — by paying off a mortgage early. Of course, you’ll need to consult your mortgage documentation to ensure that your lender doesn’t charge a prepayment penalty, or if it does, that it would still be a cost-efficient decision to make. Only some lenders charge a prepayment penalty, and of those that do, typically only within the first few years (usually three to five).

Making Extra Mortgage Payments

If you can’t afford to pay off your mortgage early in its entirety all at once, you can chip away at the loan over time by making more than the minimum monthly payment. It’s a good idea to ensure that the additional funding is going directly toward your principal balance (the amount of money you borrowed in the first place). That way, you’re dialing down the amount of interest you’ll pay before it can even accrue.

Staying in Your Home for Five or More Years

Along with chipping away at the amount you owe, the other function that increases equity is allowing your home to appreciate. Although that rise in value isn’t guaranteed, if it’s going to happen, it takes time. Thus, staying in your home for a longer amount of time (at least five years) gives you a better chance at building enough equity for all the other costs of homeownership to be worth it.

Increasing Home Value Through Renovations

Allowing your home to naturally increase in value over time is one thing, but you can also take matters into your own hands and help drive up the value by renovating or remodeling. (Not sure about renovations vs. remodels? Essentially, remodels are more extensive — and expensive.)

While even lower-cost renovations, like painting, can increase the home value a little, major repairs may have major costs associated with them. Sometimes, though, the equity increase you’d gain makes it worth going to the expense in the short term. Home improvement loans can help make these efforts more accessible (but again, always look ahead to ensure that debt won’t eclipse the equity you’d stand to build).

That said, it’s important to think through the pros and cons of reverse mortgages, as borrowing against your home equity comes with risk. (For example, if the loan total ends up being more than the value of the home, heirs might lose the house, or need to refinance, if they can’t pay off the reverse mortgage in full.)

How to Use Home Equity

Once you’ve built up a significant amount of equity in your home, you may be able to use it as collateral to get a loan or line of credit. How much is significant? It varies by lender and situation, but typically at least 15% to 20%. But remember that while drawing on your equity can be tempting, you will have to pay back whatever money you take out as well as continue to make your original mortgage payments. That’s why it’s a good idea to consider tapping your home equity carefully in the context of your larger financial goals.

Buying a New Home

It may seem counterintuitive, but you can borrow against your home equity value to help purchase a new home. In fact, some people end up taking out home equity loans to purchase a second or investment home.

Borrowing Against Home Equity

There are several equity home loan types that can be used to liquify the cash wrapped up in your home and make it spendable. Just be aware that these loans come with costs and risks. For example, if the housing market suddenly shifts and your home’s value decreases substantially, you may find yourself in a hole. And if you can’t make the payments, you could even lose your home. Your home, after all, is the collateral for these loans.

Here are a few of the most common ways to borrow against your home equity:

•   A home equity loan offers a borrower a lump sum up front, based on their home equity. In return, they pay it back, typically through regular fixed payments throughout the term of the loan. There are generally closing costs.

•   A home equity line of credit (HELOC) works much like a credit card. A homeowner who takes out a HELOC has the opportunity to draw out cash as needed, up to a certain maximum limit. During the draw period (typically the first 10 years), they can often pay back only the interest on what they’ve withdrawn. After the draw period comes the repayment period, when they will have to pay back any principal, plus interest. Interest rates and payments are usually not fixed. Closing costs may be lower than those for a home equity loan and sometimes waived entirely if the borrower keeps the credit line open for a number of years.

•   With a cash-out refinance, a borrower takes out an entirely new mortgage while borrowing a portion of their existing home equity in cash. There are generally closing costs.

💡Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

How to Calculate Your Home Equity

Phew! That’s a lot of information. To recap, here’s how to calculate your home equity:

Keep in mind, again, that “home value” isn’t the same as “purchase price.” To know for sure what your home value is in the current market, you’d need an up-to-date appraisal, but you can use estimates from your favorite real estate site or agent.

The Takeaway

While nothing is a surefire ticket to wealth, building home equity is one of the most historically reliable ways to grow your net worth. And down the line, home equity can be leveraged for a variety of loans.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What is a home equity loan?

A home equity loan provides the borrower with a lump sum of cash up front in return for fixed payments on a regular basis throughout the life of the loan. The borrower’s equity in the home serves as the collateral for the loan, so if the homeowner defaults, the lender may foreclose on the house.

How does a home equity loan work?

A home equity loan lets you use the equity you have in your home to secure a loan. You receive a lump sum. To pay it back, you make regular, fixed payments for the duration of the loan term. If you can’t or won’t make the payments, the lender may be able to foreclose on the house.

How does a home equity line of credit work?

A home equity line of credit (HELOC) lets you use the equity you have in your house to create a line of credit, much like a credit card. Once you’ve set it up, you can borrow (or “draw”) funds up to your HELOC’s maximum during the draw period. As you pay back what you’ve borrowed, the credit line replenishes and you can draw more again until the repayment period, when you are paying back principal and interest. Typically, HELOCs have adjustable interest rates, and your payments will depend on how much you choose to borrow.

Is it a good idea to take equity out of your house?

Whether or not taking equity out of your home is a good idea depends on your financial situation and motivations. Taking out a home equity loan for a month-long luxury cruise is not practical for most long-term financial goals. But taking out a home equity loan to pay for renovations or improvements to your home that will increase its value can potentially increase the worth of the equity you have in your home.

Do you pay back home equity?

When you take out a home equity loan, you start making payments, but technically you’re not paying back home equity, you are paying back the loan you took out. That said, you must pay back the loan or the lender may be able to claim your house.

Photo credit: iStock/PC Photography

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q225-010

If you’re like many Americans, you dream of having a beach house, a desert escape, or a mountain hideaway. Perhaps you’re tired of staying at hotels and want the comforts of home at your fingertips. It might be time to consider investing in a vacation home. But where to begin? Let us be your guide.

How to Buy a Vacation Home

You’re ready to make this dream a reality. Before you do, consider these steps.

1. Choose a Home That Fits Your Needs

As you begin your search for a vacation home, carefully consider your goals and needs. Start with the location. Do you prefer an urban or rural area? Lots of property or a townhouse with just a small yard to care for?

Consider what amenities are important to be close to. Where is the nearest grocery store? Is a hospital accessible?

Think about your goals for the property. Is this a place that only you and your family will use? Do you plan to rent it out from time to time? Or maybe you plan to be there only a couple of weeks out of the year, using it as a rental property the rest of the time.

The answers to these questions will have a cascade effect on the other factors you’ll need to consider, from financing to taxes and other costs.

2. Figure Out Financing

Next, consider what kind of mortgage loan works best for you, if you’re not paying cash. Some borrowers engage a mortgage broker or direct lender to help with this process.

If you have a primary residence, you may be in the market for a second mortgage. The key question: Are you purchasing a second home or an investment property?

Second home. A second home is one that you, family members, or friends plan to live in for a certain period of time every year and not rent it out. Second-home loans have the same rates as primary residences. The down payment could be as low as 10%, though 20% is typical.

Investment property. If you plan on using your vacation home as investment property to generate rental income, expect a down payment of 25% or 30% and a higher interest rate for a non-owner-occupied property. If you need the rental income in order to qualify for the additional home purchase, you may need to identify a renter and have a lease. A lender still may only consider a percentage of the rental income toward your qualifying income.

Some people may choose to tap equity in their primary home to buy the vacation home. One popular option is a cash-out refinance, in which you borrow more than you owe on your primary home and take the extra money as cash.

To get a handle on how much house you may be able to afford, check out our home affordability calculator.

3. Consider Costs

While you determine the goals you’re hoping to accomplish by acquiring a vacation home, try to avoid home-buying mistakes.

A mortgage lender can delineate the down payment, monthly mortgage payment, and closing costs. But remember that there are other costs to consider, including maintenance of the home and landscape, utilities, furnishings, homeowners insurance, property taxes, and travel to and from the home.

If you’re planning on renting out the house, determine frequency and expected rental income. Be prepared to take a financial hit if you are unable to rent the property out as much as you planned.

4. Learn About Taxes

Taxes will be an ongoing consideration if you buy a vacation home.

A second home qualifies for mortgage interest deduction and property tax deductions as long as the home is for personal use. And if you rent out the home for 14 or fewer days during the year, you can pocket the rental income tax-free.

If you rent out the home for more than 14 days, you must report all rental income to the IRS. You also can deduct rental expenses.

The mortgage interest deduction is available on total mortgages up to $750,000. If you already have a mortgage equal to that amount on your primary residence, your second home will not qualify. Changes may be made in the tax code in 2025, so keep an eye on the news for updates.

The bottom line: Tax rules vary greatly, depending on personal or rental use. Consult a tax advisor for help understanding your specific circumstances.

5. Research Alternatives

There are a number of options to owning a vacation home. For example, you may consider buying a home with friends or family members, or purchasing a timeshare. But before you pursue an option, carefully weigh the pros and cons.

If you’re considering purchasing a home with other people, beware the potential challenges. Owning a home together requires a lot of compromise and cooperation. One thing you will want to understand if you are sharing a home is tenancy in common vs. joint tenancy. How you structure your rights to the property has long-term implications for ownership.

You also must decide what will happen if one party is having trouble paying the mortgage. Are the others willing to cover it?

In addition to second home and investment properties, you may be tempted by timeshares, vacation clubs, fractional ownership, and condo hotels. Be aware that it may be hard to resell these, and the property may not retain its value over time.

6. Make It Easy to Rent

If you do decide to invest in a rental home, you have to take other people’s concerns and desires into account. Be sure to consider the factors that will make it easy to rent. A home near tourist hot spots, amenities, and a beach or lake may be more desirable.

Consider, too, factors that will make the house less desirable. Is there planned construction nearby that will make it unpleasant to stay at the house?

How far the house is from your main residence takes on increased significance when you’re a rental property owner. Will you have to engage a property manager to maintain the house and address renters’ concerns? Doing so will increase your costs.

7. Pay Attention to Local Rules

Local laws or homeowners association rules may limit who you can rent to and when.

For example, a homeowners association might limit how often you can rent your vacation home, whether renters can have pets, where they can park, and how much noise they can make. And the local government may have restrictions on whether owners can list their home on home-sharing websites.

Be aware that these rules can be put in place after you’ve purchased your vacation home.

8. Tap Local Expertise

It’s a good idea to enlist the help of local real estate agents.

Vacation homes tend to exist in specialized markets, and these experts can help you navigate local taxes, transaction fees, zoning, and rental ordinances. They can also help you determine the best time to buy a house in the area you’re interested in.

Because they are familiar with the local market and comparable properties, they are also likely to be more comfortable with appraisals, especially in low-population areas where there may be fewer houses to compare.

The Takeaway

Buying a vacation home can be a ticket to relaxation or a rough trip. It’s imperative to know the rules governing a second home vs. a rental property, tax considerations, and more. One thing to sort out early on in the process is how you will finance your vacation house. With that to-do marked off your list, you’re one step closer to relaxing at the pool, in the forest, or by the lake.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is financing a vacation home hard?

Getting together the financing for a vacation home may be somewhat more challenging for buyers who need a mortgage because lenders typically require a larger down payment on a vacation property than they do on a primary residence. Eligible borrowers might put down 3.5% for a down payment on a primary home. The minimum required for a second home is typically 10% and sometimes as much as 20%.

Is it a good idea to buy a vacation home?

Whether buying a vacation property is a good idea for you will ultimately depend on how much you use the home and how you benefit from it (psychologically and financially) vs. how much stress it adds to your life. One way to get a sense of how your life may be impacted is to rent for a while in your chosen location.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

SOHL-Q225-057

While you may be established in your career once you reach your 30s, it’s still not that easy to build wealth. Suddenly you’ve often got a host of other financial priorities like paying down debt, saving for your first home, and paying for childcare.

However, making sure your money is working for you now matters, especially when it comes to building wealth over the long term. Saving money is a good start, but more importantly, your 30s are a prime time to develop a consistent investing habit.

Think of this decade as a great time to learn new money skills that can help set you up for the future.

What Does Wealth Mean to You?

One way to motivate yourself to build wealth in your 30s is by thinking about the opportunities it can create. Retiring early or being able to enjoy bucket-list vacations with your family, for example, are the kinds of things you’ll need to build up wealth to enjoy.

Beyond that, wealth means that you don’t have to stress about covering unexpected expenses or how you’ll pay the bills if you’re unable to work for a period of time.

Investing in your 30s, even if you have to start small, can help create financial security. The more thought you give to how you manage your money in your 30s, the better when it comes to improving your financial health now and for the future.

So if you haven’t selected a target savings number for your retirement goals yet, run the numbers through a retirement calculator to get a ballpark figure. Then you can formulate a plan for reaching that goal.

6 Tips For Building Wealth in Your 30s

Curious about how to build wealth in your 30s? These tips can help you figure out how to save money in your 30s, even if you’re starting from zero.

1. Set up a Rainy Day Fund

Life doesn’t always go as planned. It’s important to have a nice cushion of cash to land on, should any bad news come your way, such as a job loss, a medical emergency, or a car repair.

Not having the money for these unexpected expenses can threaten your financial security. To prevent such shocks, sock away at least three-to-six months’ worth of savings in an emergency fund that can budget for your everyday living expenses, from rent on down.

2. Pump Up Your 401(k)

If your company offers a 401(k) plan, consider it an opportunity for investing in your 30s while potentially reducing your current taxes. This is especially true if your employer offers a match (though matching is typically only offered if you contribute a certain amount). The match is essentially free money, so you should take full advantage of it, if possible. (Note that SoFi does not offer 401(k) plans at this time, but we do offer a range of Individual Retirement Accounts (IRAs).

Aim to increase your 401(k) contributions on a regular basis. This could be once a year or twice a year, and whenever you get a bonus or a raise. Some plans allow you to do this automatically at certain pre-decided intervals.

3. Consider Other Retirement Funds

If you don’t have access to a 401(k), there are other options that can help fund your future and help you with building wealth in your 30s.

And even if you contribute to a 401(k), you may benefit from these additional options. For example, if you’re already maxing out your 401(k), you might continue saving for retirement with an Individual Retirement Account (IRA)

With a traditional IRA, you contribute pre-tax dollars, and depending on your income, tax-filing status, and whether you or your spouse have a workplace retirement plan, a certain amount can be deducted from your taxes. You pay taxes on traditional IRA withdrawals in retirement.

You can also consider a Roth IRA, depending on your income level and filing status (a Roth IRA has contribution limits based on these factors). Contributions are made with after-tax dollars and withdrawals are tax-free in retirement.

In addition to tax-advantaged accounts, you might consider opening a taxable investment account to make the most of your money in your 30s. With taxable accounts, you don’t get the same tax breaks that you would with a 401(k) or IRA. But you’re not restricted by annual contribution limits or restrictions around withdrawals, so you can continue growing wealth in your 30s at your own pace as your income allows.

4. Open a Health Savings Account (HSA)

If you have access to a Health Savings Account, this could be a valuable resource for building wealth in your 30s. For those who qualify, this is a personal savings account where you can sock away tax-advantaged money to pay for out-of-pocket medical costs. These could include doctor’s office visits, buying glasses, dental care, and prescriptions.

The money you save is pre-tax, and it grows tax-free. Also, you don’t have to pay taxes on any money you withdraw from your HSA, as long as it’s for a qualified medical expense.

You’ll need to be enrolled in a high deductible health plan to be eligible for an HSA. If your company offers health insurance, talk to your plan administrator or benefits coordinator to find out whether an HSA is an option.

5. Give Yourself Goals

One of the best ways to build wealth in your 30s involves setting clear financial goals. For example, you might use the S.M.A.R.T. method to create money goals that are specific, measurable, achievable, timely and realistic.

Then, start working toward those goals, whether it’s sticking to a budget or paying down debt like your credit card or auto loan. Once you experience the satisfaction of meeting these goals, you’ll be able to think bigger or longer term for your next goal.

6. Check Your Risk Level

Investing is about understanding risk, knowing how much risk you’re prepared to take, and choosing the types of investments that are right for you.

If you’re working out how to build wealth in your 30s, consider two things: Risk tolerance and risk capacity. Your risk tolerance reflects the amount of risk you’re comfortable taking. Risk capacity, meanwhile, is a measure of how much risk you need to take to meet your investment goals.

As a general rule of thumb, the younger you are the more risk you can take on. That’s because you have more time until retirement to smooth out market highs and lows. Investing consistently through the ups and downs using dollar-cost averaging may help you generate steady returns over time.

If you’re not sure what level of risk you’re comfortable with, taking a free risk assessment or investing risk questionnaire can help. This can give you a starting point for determining which type of asset allocation will work best for your needs, based on your age and appetite for risk.

The Takeaway

Investing in your 30s to build wealth can seem intimidating, but once you set clear goals for yourself and start taking steps to reach them, it can get easier.

Watching your savings grow through budgeting, paying down debt, and investing for retirement can motivate you to keep working toward financial security and success.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.