What Is Home Equity?
Updated: January 27 2026 • 6 min read
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<p><span>Bennett Leckrone is the editorial manager and an analyst for Lower. He specializes in making complicated mortgage topics accessible for consumers. That includes both in-depth product guides and in-depth analysis on what economic moves mean for homebuyers and refinancers.</span></p>
<p><span>He was previously a business reporter with a focus on higher education and fintech at BestColleges. In that role, he reported on the development of fintech and AI curriculum, as well as the rapidly changing nature of finance education. He also wrote guides to help business students navigate AI and online education.</span></p>
<p><span>He also reported on state politics at Maryland Matters, with a focus on how policy affected people and businesses. He holds a bachelor of science in journalism degree from Ohio University.</span></p>
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REVIEWER: (SizeLimitingPyMap: {bio=<p><span>Neel Patel is a mortgage industry professional with more than a decade of hands-on experience across loan origination, customer experience, sales operations, and strategy. He has worked at every stage of the mortgage lifecycle, from advising individual borrowers to leading teams of loan officers. </span></p>
<p><span>As an expert reviewer, Neel evaluates mortgage and personal finance content for accuracy, clarity, and real-world applicability. He specializes in ensuring information reflects how lending actually works in practice so consumers can make confident, informed decisions.</span></p>, hs_child_table_id=0, hs_created_at=1770998587713, hs_created_by_user_id=85123122, hs_deleted_at=0, hs_id=207521716567, hs_initial_published_at=1770998795717, hs_is_edited=false, hs_name=Neel Patel, hs_path=neel-patel, hs_published_at=1770998795717, hs_updated_at=1770998733653, hs_updated_by_user_id=85123122, name_first_last=Neel Patel, profile_picture={url=https://19577492.fs1.hubspotusercontent-na1.net/hubfs/19577492/Neel%20Patel%20Cropped%204.jpg, width=1638, height=2048, altText=Neel Patel, fileId=207528140173, type=image}, tags=[{id=2, name=reviewer, label=Reviewer, isHubspotDefined=false, labelTranslations={}, type=option, createdAt=1770043811028, createdByUserId=83124684, updatedAt=1770043811028, updatedByUserId=83124684, order=1}]})
Written by
Bennett Leckrone
Writer / Reviewer / Expert
Reviewed by
Neel Patel
Reviewer
Key Takeaways
- Home equity is the value of your home minus what you owe on your mortgage.
- Equity grows through loan repayment and home appreciation.
- Built-up equity can unlock refinancing and borrowing options, but using that equity also comes with risks.
See how much equity you can access.
Home equity is the portion of your home you own, but it’s more than just a number: It’s also a powerful financial tool.
As you pay down your mortgage, you gradually build up the amount of equity you have in your home. Equity gives you resources and flexibility, because you can tap into it with loans like HELOCs and home equity loans.
What is Home Equity?
Home equity is the difference between your home’s current market value and the amount you still owe on your mortgage.
You can think of home equity as the portion of your home that belongs to you, not the lender. If you sold your home today and paid off your mortgage, your equity is what you would walk away with after selling costs.
When your home is worth more than you owe, home equity is positive. Home equity can also be negative if your mortgage exceeds your home’s value, but most homeowners build equity gradually over time as they pay down their home and home values rise.
How is home equity calculated?
The formula for home equity is straightforward. It’s your current home value minus your outstanding mortgage balance.
As an example:
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If your home value is $400,00
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And you have $240,000 left on your mortgage.
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You have $160,000 in home equity.
Your home’s value is typically based on recent comparable sales in your area, while your mortgage balance comes from your latest loan statement.
Keep in mind that your home value’s appreciation, or how much it grows every year, also factors into your equity. Recent Fannie Mae data shows a year-over-year increase in average home prices of roughly 3%, but that has varied based on economic conditions over time.
Calculate Your Home Equity
Home Equity Calculator
Estimate your equity today and model how it could change over time based on mortgage payoff and optional home appreciation.
Your Results
| Year | Home value | Mortgage | Equity | LTV |
|---|
| Month | Payment | Principal | Interest | Balance |
|---|
This tool estimates equity today and projects equity over time using two building blocks: home value and mortgage balance.
1) Equity
Equity = Home value − Mortgage balance
2) Home value over time (optional appreciation)
If “Include annual home appreciation” is checked, the calculator compounds home value each year:
Future home value = Today’s value × (1 + a)y
where a is the annual appreciation rate (as a decimal) and y is years in the future. If appreciation is unchecked, the tool uses a = 0.
3) Mortgage balance over time (amortization)
The mortgage projection assumes a standard fixed-rate loan on your current remaining balance with years remaining.
Monthly payment = P × r × (1 + r)n / ((1 + r)n − 1)
where P is today’s mortgage balance, r is the monthly interest rate (APR/12), and n is the number of remaining payments (years remaining × 12).
Each month, interest is calculated on the remaining balance and the rest of the payment reduces principal:
Interest = Balance × r
Principal = Payment − Interest
New balance = Balance − Principal
4) What the “Key years” table shows
For Year 0, a midpoint year, and the final year, the calculator: (a) estimates home value, (b) estimates remaining mortgage balance after y years, then (c) computes equity and loan-to-value (LTV).
LTV = Mortgage balance / Home value
Connect with an expert loan officer learn more about how to use your equity
How Homeowners Build Equity
Home equity isn’t static. It changes over time based on both your actions and the housing market.
Equity rises when you make regular mortgage payments that reduce your loan balance, home values rise due to market appreciation, and you make value-adding improvements like renovations or upgrades.
Equity decreases when home values fall, you refinance or take cash out, or you borrow against your equity through a loan or HELOC.
Equity increases when:
- You make regular mortgage payments that reduce your loan balance. Mortgage payments include both principal and interest. Paying down the principal is what gets you equity, but the amount of principal you pay might depend on your loan term.
- Home values rise due to market appreciation.
- You make value-adding improvements, such as renovations or upgrades.
Equity decreases when:
- Home values fall.
- You refinance and take cash out.
- You borrow against your equity through a loan or HELOC.
For many homeowners, the biggest long-term equity drivers are mortgage amortization and home price appreciation.
Why Home Equity Matters
Home equity plays a central role in many major financial decisions.
It can affect:
- Whether you can refinance into a better mortgage rate: Many lenders require you to build up equity before refinancing.
- Your ability to remove private mortgage insurance (PMI): For conventional loans, PMI automatically falls off when you hit 78% equity, although you can request it be cancelled at 80%.
- How much you can borrow using your home as collateral: Lenders often calculate home equity loan and HELOC limits using a combined loan-to-value (CLTV) ratio. Many lenders, for example, cap HELOCs at 80% to 85%. That means the value of your mortgage and all existing home equity loans, in addition to the HELOC you’re applying for, can’t exceed 80% to 85% of your home value and having equity built up is a requirement.
- Your total net worth and long-term financial stability: Being able to tap into your home’s equity gives you access to powerful tools and debt consolidation options.
How Home Equity is Used
Once you’ve built equity, you may be able to put it to work.
Common uses of home equity include:
- Home equity loans : Lump-sum borrowing with a fixed rate.
- Home equity lines of credit (HELOCs) : Flexible, revolving access to funds.
- Mortgage refinancing: Using equity to lower rates, shorten loan terms, or eliminate PMI. That includes cash-out refinances, which replace your mortgage with a larger one and let you take a portion of your equity as cash.
Because home equity loans are secured by your property, they often come with lower interest rates than unsecured options. That means they can be used for debt consolidation in addition to home improvements, education costs, and other large expenses.
Home Equity Loans vs. HELOCs
Home equity loans and HELOCs are both common ways to tap into your home’s equity, but they work in different ways.
Home equity loans provide a one-time lump sum with predictable payments. HELOCs function more like a credit card, with variable rates and flexible borrowing.
The right choice depends on how much you need, how you plan to use the funds, and how comfortable you are with changing interest rates.
Risks of Using Home Equity
While home equity can be a powerful resource, it’s not risk-free.
Borrowing against equity increases your total debt, and falling home values can mean falling equity. Failure to repay loans backed by your home’s equity can also put you at risk of losing your home.
HELOCs often come with variable rates, which means that rates can change over the life of the loan and become more expensive if rates rise.
The Bottom Line
Home equity is the amount of your home you actually own. It builds up as you repay your mortgage and as home values increase. Built-up equity can unlock refinancing and borrowing options, but using that equity also involves trade-offs and risks.
Frequently Asked Questions
What is equity in a home?
Home equity is the difference between your home’s market value and the remaining balance on your mortgage.
How is home equity calculated?
Home equity is calculated by subtracting your outstanding mortgage balance from your home’s current value.
What are the benefits of building home equity?
Building equity increases net worth and gives homeowners access to refinancing options and lower-cost borrowing.
How can home equity be used?
Home equity can be used through home equity loans, HELOCs, or mortgage refinancing, often for renovations, debt consolidation, or major expenses.
What are the risks of using home equity?
Risks include reduced ownership stake, exposure to market downturns, higher debt, and potential foreclosure if loans aren’t repaid.