Home Equity

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Home Equity: What It Is, How It Works, and How to Use It

What is home equity?

Home equity is the portion of a property’s market value that you own outright. It equals the home’s current market value minus any outstanding liens (for example, your mortgage balance). Equity grows when you pay down principal and when the home’s value appreciates. It is an asset but generally not liquid—converting it to cash usually requires a loan or refinance.

Quick definition:
* Equity = Current market value − Outstanding loan balance

How to calculate equity (examples)

  1. Simple calculation:
  2. If your home is worth $350,000 and you owe $150,000, your equity = $350,000 − $150,000 = $200,000.
  3. Purchase example:
  4. Buy a $300,000 home with 20% down ($60,000). Mortgage = $240,000, so initial equity = $60,000.
  5. If you pay $15,000 of principal over two years, equity = $75,000.
  6. If the home also appreciates by $100,000, equity = $175,000.

How equity grows and shrinks

Ways it increases:
* Making a down payment and paying principal over time.
* Home price appreciation.
* Home improvements that add market value.

Ways it decreases:
* Home price declines.
* Borrowing against the equity (second mortgage, HELOC, cash-out refinance).

Ways to borrow using home equity

Home equity can secure lower-cost borrowing because it’s collateralized by your home. Common options:

Tax note: Interest on equity-based loans is generally deductible only in specific cases (e.g., when funds are used to substantially improve the home). Check current tax rules or consult a tax advisor.

How to use home equity

Common uses:
* Eliminate private mortgage insurance (PMI) once your equity reaches lender thresholds (typically 20%–22%).
* Consolidate high-interest debt (credit cards, personal loans).
* Finance major expenses (home improvements, education, medical bills).

How to increase your equity

  • Make a larger down payment at purchase.
  • Choose a mortgage that pays principal from the start (avoid interest-only loans if your goal is steady equity build-up).
  • Make on-time mortgage payments and, when possible, pay extra toward principal.
  • Stay in the home to benefit from appreciation.
  • Invest in value-adding home improvements (research which projects typically increase resale value).

Pros and cons of borrowing against equity

Pros
* Lower interest rates than unsecured credit.
* Easier approval if you have sufficient equity.
* Potential interest tax benefit when used for qualifying home improvements.

Cons
* Adds debt and monthly payment obligations.
* Fees and closing costs may apply.
* Your home is collateral—failure to pay can lead to foreclosure.
* Some products restrict how funds must be used.

How to get a home equity loan or HELOC

Typical steps:
1. Estimate your home’s market value (comparative sales or a professional appraisal).
2. Check your mortgage payoff balance and calculate available equity.
3. Shop lenders and compare rates, fees, and terms.
4. Lender reviews credit score, income, and debt-to-income ratio.
5. Close the loan (funds delivered as a lump sum for a home equity loan, or a line is established for a HELOC).

Borrower protections and fairness

Mortgage lending discrimination is illegal. If you suspect unlawful discrimination in lending, you can report the incident to the Consumer Financial Protection Bureau or the Department of Housing and Urban Development.

Bottom line

Home equity is a major component of homeowners’ net worth and can be a flexible source of lower-cost funding. Building equity through down payments, principal payments, and home appreciation positions you to borrow at lower rates or to refinance. However, borrowing against equity increases debt and places your home at risk if you cannot repay, so weigh costs, uses, and alternatives before tapping it.