Home Equity

· 2 min read
Home equity is the dollar amount of your house that belongs to you free and clear — subtract what you owe on your mortgage from…

Home equity is the dollar amount of your house that belongs to you free and clear — subtract what you owe on your mortgage from what the house is worth, and that’s your equity.

For most Americans, home equity is their single largest financial asset. The typical homeowner who’s been in their home 10+ years is sitting on $150,000 to $300,000 in equity. That’s real money, even if it’s not sitting in a bank account.

Calculating Your Home Equity

It’s a one-line equation:

Home Equity = Current Market Value – Remaining Mortgage Balance

Bought your home for $320,000 five years ago with a $256,000 mortgage. The home is now worth $385,000 and you’ve paid the mortgage down to $232,000. Your equity: $385,000 – $232,000 = $153,000. You started with $64,000 in equity (your down payment) and gained $89,000 through appreciation and loan paydown.

Ways to Access Home Equity

You can tap your equity without selling through three main options:

  • Home Equity Loan: A lump sum at a fixed rate. Typical terms are 5-30 years. Good for one-time expenses like a major renovation.
  • HELOC (Home Equity Line of Credit): A revolving credit line you draw from as needed. Variable rate, typically 10-year draw period. Works like a credit card secured by your house.
  • Cash-Out Refinance: Replace your current mortgage with a larger one and pocket the difference. Makes sense when rates are low enough to justify replacing your existing loan.

Most lenders let you borrow up to 80% of your home’s value, minus what you owe. On a $400,000 home with a $250,000 mortgage: 80% of $400,000 is $320,000, minus $250,000 = $70,000 available to borrow.

Building Equity Faster

Make extra principal payments — even $100/month extra on a $300,000 mortgage saves tens of thousands in interest and builds equity years faster. Biweekly payments accomplish the same thing by sneaking in one extra payment per year.

Home improvements that increase market value also build equity, though not every project returns dollar-for-dollar. Kitchen and bathroom remodels typically return 60-80% of cost. A $50,000 pool might add only $25,000 in value.

Risks of Tapping Equity

Your home secures these loans. Default on a HELOC, and the lender can foreclose — even if your primary mortgage is current. Treating your home like an ATM is what got millions of people in trouble during the 2008 housing crisis.

Borrow against equity for investments or improvements that increase your net worth. Don’t borrow against it for vacations or consumer spending.

Model your equity growth with our mortgage calculator, check out our renovation ROI calculator to see which improvements build equity fastest, and explore more terms in the glossary.

The two main ways to tap your equity work very differently. Our HELOC vs. home equity loan comparison explains the key differences.