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    What Is Home Equity?

    Updated: January 27 2026 • 6 min read

    Written by Bennett Leckrone
    Bennett Leckrone

    Written by
    Bennett Leckrone
    Writer / Reviewer / Expert

    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. 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. 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.
    Reviewed by Neel Patel
    Neel Patel

    Reviewed by
    Neel Patel
    Reviewer

    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. 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.
    Our Editorial Standards

    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.
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    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:

    • If your home value is $400,00

    • And you have $240,000 left on your mortgage.

    • 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

     You can use our calculator below to see different scenarios for appreciation and how it can affect home equity. Keep in mind that appreciation isn’t guaranteed, and can vary widely across the country.

    Home Equity Calculator

    Estimate your equity today and model how it could grow over time based on mortgage payoff and optional home appreciation.

    Home details

    %/yr
    yrs
    Projection uses standard amortization on remaining balance.

    Mortgage details

    %
    yrs
    Balance treated as $0 once mortgage is paid off.
    Educational estimate only. Excludes taxes, insurance, PMI, HOA, closing costs, refinancing.

    Your Results

    Equity today
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    Equity in — yrs
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    Change
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    Equity vs. mortgage
    Today
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    End (— yrs)
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    EquityMortgage
    End Home Value—
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    LTV today → end—
    Key years
    How this calculator works

    This tool estimates your equity today and projects how it may change over time using two inputs: home value and mortgage balance.

    Equity today:

    Equity = Home value − Mortgage balance

    Future home value (if appreciation is enabled):

    Future value = Today's value × (1 + annual rate)years

    Future mortgage balance uses standard fixed-rate amortization on your current remaining balance:

    Monthly payment = P × r × (1 + r)n / ((1 + r)n − 1)
    where P = current balance, r = monthly rate (APR ÷ 12), n = months remaining

    Each month, interest accrues on the remaining balance and the rest of the payment reduces principal. The "Key years" section shows Year 0, a midpoint, and the final year as plain-language sentences.

    Estimates only. Excludes taxes, insurance, PMI, HOA, maintenance, future refinances, and HELOCs. Appreciation and interest rates are assumed constant.

    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:

    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.

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