What is home appreciation in real estate?

Home appreciation is one of the most effective ways property owners can build long-term wealth. When you buy a home, you're not just securing a place to live. You're making an investment that will ideally grow in value over time.

Understanding how your property gains value can also help you make smarter financial decisions, whether it’s timing a refinance, planning home improvements, or accessing your home's equity for major expenses. 

In this guide, we’ll explain what home appreciation is, what drives it, and how to calculate it. We’ll also share tips to make the most of your property’s increasing value.

What is home appreciation?

Home appreciation is when your property value grows beyond what you originally paid for it. Historically, the average appreciation of real estate has been around 3–5% a year, though it varies significantly depending on location and housing market conditions. When demand for homes in your area exceeds supply, prices tend to rise, boosting your property's worth.

Several factors drive home appreciation, such as neighborhood upgrades, local economic growth, and overall real estate market trends.

As your home's price appreciates, you also build equity, which is the difference between what you owe on your mortgage and what your home is currently worth. Over time, making steady mortgage payments, paying down debt, and riding positive market forces can all help increase your property’s value and long-term wealth.

Home appreciation vs. home depreciation

While home appreciation means your property gains value, depreciation is when your home loses value over time. Most real estate appreciates in the long run, but temporary depreciation can occur because of economic downturns, natural disasters, or neighborhood deterioration.

Depreciation might happen if major employers leave the area, crime rates rise, or infrastructure deteriorates. Poor home maintenance can also cause a property to lose value, even when the broader housing market is strong. 

The good news is that depreciation is often temporary, and most properties recover their value as markets improve. Short-term fluctuations are normal, but historical data shows that well-kept homes in desirable locations tend to appreciate over time.

Appreciation vs. inflation

House appreciation per year and inflation rates aren’t directly linked, though both influence your purchasing power. Inflation shows how much prices for goods and services rise over time. Home appreciation reflects how property values increase because of supply, demand, and other market factors.

In strong real estate markets, home appreciation can rise faster than inflation, meaning your property gains value faster than everyday living costs go up. At other times, especially when the housing market cools, inflation may outpace home appreciation, cutting into your purchasing power even as your home price climbs on paper.

Smart homeowners keep both in mind when making long-term financial decisions. For example, if your home appreciates at 4% annually while inflation is at 2%, you’re building real wealth. But if inflation hits 6% and your property value only grows 3%, you’re losing purchasing power despite the price increase.

The benefits of home appreciation

When your home’s value goes up, it can open the door to better financing options, increased equity, and greater long-term wealth. Here’s how rising property values can work in your favor.

You build equity

As your home's value rises, so does your equity, which is the portion of your property that you actually own. This equity represents real wealth you can access through various loan options. Every month, your mortgage payments reduce what you owe while market appreciation potentially increases what your home is worth. Together, the two help you build equity faster.

Opportunities to refinance

When your home appreciates, you might qualify for better refinance terms. A higher property value can help you eliminate private mortgage insurance, secure lower interest rates, or switch from an adjustable-rate mortgage to a fixed-rate option. 

Better's streamlined digital application process makes it easy to explore refinancing options when your home's value increases.

...in as little as 3 minutes – no credit impact

Build long-term wealth

Real estate appreciation offers a relatively stable way to grow wealth over time. Unlike stocks or other investments that are often highly volatile, property values in most housing markets tend to trend upward. Combined with mortgage principal reduction, this appreciation creates a powerful, low-maintenance wealth-building strategy once you've purchased your home.

How to calculate the appreciation of a house

The home appreciation formula is straightforward: Subtract your original house price from your current home value, divide that number by the original price, then multiply by 100 to get a percentage. 

For example, if you bought your home for $200,000 and it's now worth $240,000, the calculation would be:

$240,000 – $200,000 = $40,000

($40,000 ÷ $200,000) × 100 = 20%

To determine your annual appreciation rate, take that 20% and divide it by the number of years you've owned the property. If you've owned the home for five years, your annual appreciation rate would be: 

20% ÷ 5 = 4% per year

For an accurate market value of your property, it’s best to get a professional home appraisal or request a comparative market analysis from a real estate agent. Online estimate tools can give you a quick snapshot, but they’re not reliable enough for important financial decisions.

Factors that affect home appreciation

Location is the single most important driver of property value growth. Homes in desirable neighborhoods with good schools, low crime rates, and convenient access to job centers typically appreciate faster than properties in less sought-after areas.

Market demand also plays a major role in pushing home prices higher. When buyers outnumber available properties, property values go up. Economic growth, job creation, and population increases all contribute to stronger demand in the housing market.

Upgrading your home through strategic improvements can also boost its market value. Renovations like kitchen remodels and bathroom updates typically offer solid returns, while highly personalized changes might not appeal to future buyers.

Finally, supply constraints can also fuel appreciation. In areas where new construction is limited due to geography, zoning restrictions, or high development costs, existing homes often see faster house price growth as demand outpaces supply.

Loan options for home appreciation

As your home appreciates, you gain additional equity through various loan products to help you leverage your property's value. Each option offers unique advantages depending on your financial goals and current mortgage terms:

— Home equity loans: These loans let you borrow against your property's increased value at a fixed interest rate. They provide a lump-sum payment, which makes them ideal for major expenses like home improvements and debt consolidation.

— Cash-out refinancing: This option replaces your existing mortgage with a larger loan, allowing you to take the difference in cash. It works well when mortgage rates are favorable and you need substantial funds for large projects or real estate investments.

— Second mortgages: A second mortgage allows you to access your home equity while leaving your original mortgage untouched. It’s a good choice if your current mortgage has excellent terms you want to keep.

— Home equity lines of credit (HELOCs): A HELOC is a revolving credit line based on your home equity. Better's simple application process makes it easy to obtain a one-day HELOC, providing fast access to funds when you need them. You only pay interest on what you use, which makes HELOCs a strong option for ongoing expenses or projects with uncertain costs.

...in as little as 3 minutes – no credit impact

Preventing home depreciation

Maintaining your property is the best way to preserve and enhance its value over time. Regular upkeep prevents minor problems from becoming expensive repairs that can hurt your home's worth. Well-maintained homes not only hold their value better but also often appreciate faster than neglected properties in the same neighborhood. A good starting point is a home maintenance checklist that covers seasonal tasks like HVAC servicing, gutter cleaning, and exterior inspections.

It also helps to set aside a maintenance budget of 1–3% of your home's value each year for repairs and upkeep. With funds readily available, you can handle maintenance issues quickly rather than delaying fixes that might damage your property's value.

Catching potential problems early begins with simple habits, like walking through your home regularly to spot water damage, pest activity, or structural concerns. And beyond your property lines, staying informed about neighborhood developments and supporting community improvements can help maintain your area's desirability and protect your home’s value.

Leverage your home appreciation with Better

Home appreciation is a great way to build long-term wealth while enjoying the place you live. Understanding how property values grow, the factors that drive appreciation, and how to calculate your home's appreciation rate are central to making smart financial moves as your property value increases. 

When you're ready to tap into your home equity, whether through a refinance, home equity loan, or HELOC, Better makes it simple. With competitive rates and a streamlined digital application process, you can access the funding quickly without the hassle of traditional lenders.

Apply with Better today and get pre-approved in as little as three minutes. Unlike most lenders, Better offers all three ways to access your home’s equity: HELOCs, home equity loans, and cash-out refinances. Once you’re pre-approved, a dedicated loan consultant will walk you through each option so you choose the one that’s right for you and your goals. 

...in as little as 3 minutes – no credit impact