What home equity is, and how to figure yours

Home equity comes up a lot: in refinancing ads, in conversations about selling, in mail from lenders. The idea is simple, and a rough estimate for your own home isn't hard to work out. This guide explains what equity is, how to estimate yours, what makes it change, and the common ways people use it. It's general information, not financial advice.

What home equity is

The Federal Trade Commission describes equity as the difference between what you owe on your mortgage and the current value of your home, or how much you could get for it if you sold it.¹

If more than one loan is secured by the house, count them all. The CFPB's home equity guide defines it as the value of your home minus the total of all existing mortgages on the property.² If the house is paid off, your equity is its full value.

How to estimate yours

You need two numbers: what you owe and what the home is worth.

• What you owe. Your mortgage statement shows the principal you still owe. Add any other loans secured by the home, like a home equity loan or line of credit.
• What the home is worth. This part is always an estimate. The CFPB explains that a valuation compares your home with sales of similar homes in the same area, along with details like square footage, bedrooms, bathrooms, and the year it was built.³

Lenders use a few kinds of estimates. According to the CFPB, the most common is an appraisal by a licensed appraiser who does a full inspection of the property. A real estate sales professional can give a broker price opinion. Automated valuation models are computer-generated estimates built from recent sales and other market data. Each one can land on a different number, because each one is an estimate.³

What makes equity go up or down

Equity moves when either side of the math changes.

• Paying down the loan. The part of each payment that goes to principal lowers what you owe and builds equity. The part that goes to interest doesn't. The CFPB explains that early in a typical mortgage, most of the payment goes to interest, and over time more of it goes to principal.⁵
• Home values. When homes like yours sell for more, your equity grows. When values fall, it shrinks, even if every payment is on time.
• Condition and features. An appraisal includes a full inspection and compares your home's features with similar homes that sold nearby, so the home's condition and features can affect the estimate.³
• New borrowing. A home equity loan, a line of credit, or a cash-out refinance adds to what you owe, which lowers your equity.

Ways people use home equity

Equity isn't cash in the bank. The CFPB describes it as illiquid, meaning it isn't easy to use for spending. People who want to tap it usually sell the home or borrow against it.⁶

The CFPB's home equity guide describes these common ways to borrow against it:

• Home equity loan. A lump sum, usually at a fixed rate, repaid in monthly payments on top of any mortgage you already have.²
• Home equity line of credit (HELOC). A credit line you can draw on as needed, up to a limit set by the lender, often at an adjustable rate.²
• Cash-out refinance. A new, larger mortgage that pays off the current one, with the difference paid to you in cash.²
• Reverse mortgage. For homeowners 62 or older. There are no monthly loan payments, but the balance grows over time and is repaid when you no longer live in the home. You still have to live there as your main home, pay property taxes and homeowners insurance, and keep the house in good repair.²

Some companies also offer home equity contracts, sometimes called home equity investments. You get cash up front and repay a single lump sum later, based partly on your home's value at that time. The company secures its interest with a lien on the home. The CFPB found that these contracts can be complex, that the final amount can be hard to predict, and that they often cost more than traditional home loans. A homeowner who can't pay the final amount may have to sell the home or face foreclosure.⁶

Lenders generally won't lend against all of your equity. For a cash-out refinance, home equity loan, or HELOC, the CFPB says lenders typically require you to keep at least 10 to 20 percent of your home's value as equity.² Our guide to HELOCs and home equity loans goes deeper on how those two work.

Before you decide anything

Each of the loans above uses your home as collateral. The CFPB is plain about what that means: if the payments aren't made or the other loan requirements aren't met, you could lose the home to foreclosure.² The FTC says the same about home equity loans and lines of credit.¹

The CFPB suggests a few questions to ask yourself first:²

• How much is your home worth, and how much do you owe on it?
• How long do you plan to stay? Loans secured by your home generally have to be paid off when you sell.²
• How much can you pay each month, alongside property taxes and insurance?
• How does this fit with your longer-term plans?

The FTC suggests talking with an attorney, a financial advisor, or someone else you trust before making any decision.¹ HUD-approved housing counseling agencies also offer independent advice, often at little or no cost.²

Thinking about borrowing against your home?

Home equity loans and lines of credit are secured by your home. Compare the costs and terms before you borrow.

See home equity options