What Is Home Equity?
How to calculate home equity | Cashing in on your home equity | Summary | FAQs
Home equity is the percentage of your home that you own outright. Specifically, it's the difference between what you owe on your mortgage and your home’s appraised value.
For example, if your home is valued at $300,000, and you owe $150,000 on your mortgage, then your equity is $150,000. You own 50% of your home, and your lender owns the other half.
You build equity when your home’s value increases over time, or when you pay down the balance on your mortgage. Home equity isn’t liquid cash, though you can tap into it by borrowing against it or getting a cash-out refinancing.
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How can you calculate home equity?
Your equity is your home’s appraised value, minus the amount still owed on your mortgage.
Equity = home value – amount owed on loan |
To calculate your equity, you need to know two things:
1. How much you still owe on your mortgage
Your mortgage statements should tell you how much is left on your loan. You can also ask your lender for a mortgage payoff statement.
2. Your home’s value
You can estimate your home’s value by comparing recent sale prices of similar homes in your area (this is known as a comparative market analysis, or CMA). You can also hire an appraiser for around $300–600 for an exact value.
» MORE: Get a free CMA from a top local agent through Clever’s free matching service
How to build equity faster
💰 Put down more money up front. The larger your down payment, the more equity you start with.
💸 Pay down your mortgage. The more you reduce the outstanding balance on your mortgage, the more equity you have. You can make extra payments toward your principal to build equity faster.
🛠 Increase the value of your home. Property renovations and home improvement projects can increase your home’s appraised value.
How can you borrow against your home equity?
If you’ve built up your home equity, you can borrow against it and cash in with a:
Often the interest rates on home equity loans and HELOCs are significantly lower than credit card rates.
Home equity loan
A second mortgage that allows you to convert up to 85% of your home’s appraised value as a lump sum |
🤔 How it works: Your lender appraises your home, subtracts what you still owe on your mortgage, and then lends you the difference. Like with other loans, you’ll have an interest rate, a loan term (10, 15, 20, or even 30 years), and fixed monthly payments.
💰 How much it costs: Closing costs on home equity loans range 2–5% of the loan amount. You’ll also have a fixed interest rate, which is typically higher than current mortgage rates.
🎯 Who it’s for: Homeowners with at least 15% equity who want a large cash sum
⚡ Step-by-step example of a home equity loan
Home value: $300,000 | Mortgage paid (equity): $150,000 | Mortgage owed: $150,000
$300,000 | |
|---|---|
Your lender caps your home’s borrowable value at 85% | $255,000 |
Subtract the amount you still owe on your mortgage | – $150,000 |
This is the maximum amount you can borrow on your home equity loan | $105,000 |
Home equity line of credit (HELOC)
A second mortgage that allows you to turn your equity into a revolving line of credit, like a credit card |
🤔 How it works: Your lender will extend you a credit limit, usually up to 85% of your home’s value. When you pay off what you’ve borrowed, your credit is replenished, and you can borrow up to that amount again.
HELOCs usually have two phases:
- A 10-year draw phase, during which you can borrow money as you please
- A 20-year repayment phase, during which you can no longer borrow and must pay everything back
💰 How much it costs: HELOCs are typically less expensive than home equity loans. You’ll pay for application fees, home appraisals, and a title search. Your interest rate will fluctuate throughout the life of your HELOC.
🎯 Who it’s for: Homeowners with at least 15% equity who want a line of credit for home renovation or building projects
⚡ Step-by-step example of a HELOC
Home value: $300,000 | Mortgage paid (equity): $150,000 | Mortgage owed: $150,000
$300,000 | ||
|---|---|---|
Now | Your lender caps your home’s borrowable value at 85% | $255,000 |
Subtract the amount you still owe on your mortgage | – $150,000 | |
Years 1–10 | For 10 years, you can borrow up to $105,000. You can keep replenishing however much you pay back within this time frame. | $105,000 |
Years 11–20 | You’ll have to pay back what you borrowed within the next 20 years |
Cash-out refinance
A refinance that allows you to convert up to 80% of your equity into cash by replacing your current mortgage with a bigger loan |
🤔 How it works: You get a new mortgage that equals whatever you owe on your first loan, plus the equity you’re cashing out.
💰 How much it costs: Like with other refinances, you’ll have to pay closing costs, usually between 2% and 5% of your new loan balance.
🎯 Who it’s for: Home buyers who want to use their equity for home renovations or retirement
⚡ Step-by-step example of a cash-out refinance
Home value: $300,000 | Mortgage paid (equity): $150,000 | Mortgage owed: $150,000
$150,000 | |
|---|---|
You can cash in on up to 80% of your remaining mortgage | $120,000 |
Your lender deducts 3% in closing costs… | –$3,600 |
…and gives you the rest in cash | $116,400 |
Your lender gives you a new mortgage (with a new interest rate): mortgage amount owed, plus cash-out amount | $270,000 |
Summary
- Home equity is the difference between what you owe on your mortgage and your home’s appraised value.
- You can increase your equity by paying down your mortgage balance or increasing the value of your home.
- After you’ve built up 15–20% or more of equity, you can borrow it in the form of a home equity loan, HELOC, or cash-out refinancing.
FAQs about home equity
Home equity loans and lines of credit might be a good idea if you’re making home improvements, since you're reinvesting it in the home — potentially raising its value and increasing your equity). Tapping into your home's equity might also be a smart idea if you’re trying to pay down high-interest debt, such as credit cards.
Lenders differ, but most will allow you to borrow around 80–85% of your home’s appraised value, minus what you still owe on your mortgage.
A home equity loan is a lump sum loan. You’re extended a certain amount of money, and once that’s spent, you have to pay back what you borrowed. At that point, you cannot borrow anymore. With a HELOC, however, you can borrow money repeatedly. Much like a credit card, you can borrow whenever you like, so long as you pay back what you borrow.
Yes, you can use a home equity loan to buy another home.
Yes, lenders require an appraisal for a home equity loan.