What is home equity?

Owning a home is already an accomplishment. And being a homeowner could also unlock another financial perk: the equity you've built. 

Home equity is the portion of your home’s value that you own. It’s calculated by subtracting what you owe on your mortgage from your home’s current market value. As you pay down your loan or your home value rises, your equity increases.

What is home equity?

Home equity is the difference between your mortgage balance and your home’s current value.

• Equity represents the portion of your home that you currently own.

• Homeowners care about home equity because it can help build wealth and be used to borrow money.

• Equity increases when you pay down your mortgage and when your home’s value goes up.

How does home equity work?

Home equity rises over time as the difference between the home's value and the mortgage balance widens. You start building home equity when you buy a home and make a down payment. The more you put down, the more of your home you own from the beginning.

Once you’re a homeowner, equity could continue to rise thanks to decreasing mortgage debt and increasing home value. As you make payments on your mortgage and the loan balance goes down, your equity grows. Your equity also goes up when your home's value rises.

Let’s say you buy a home for $350,000 and put down $50,000. You’re starting with $50,000 in home equity because of your down payment. Each mortgage payment raises that amount slightly.

Over the next five years, you pay down your mortgage to $275,000, and the value of your home rises to $375,000. You now have $100,000 in home equity.

What does it mean to use your home equity?

Using your home equity generally refers to turning that equity into cash. One of the most common ways to access home equity is to borrow against it with a home equity loan. Selling your home is another way of using home equity. After you pay off your remaining mortgage and closing costs, the equity you’ve built up becomes money you can use however you like.

How do you calculate home equity?

Use the following formula to calculate home equity:

Subtract your mortgage balance from the market value of your home. 

If your home is worth $300,000 and you owe $220,000 on your mortgage, you have $80,000 in home equity. Here’s the calculation:

$300,000 - $220,000 = $80,000

You could get an estimate of your home’s value online. Many real estate websites offer home value estimators. The most accurate way to check your home’s value is an appraisal, which is what lenders typically do when homeowners apply for home equity loans. Home value estimators are a quick and free way to get a ballpark idea of  your home’s worth.

Can home equity go down?

Yes, home equity can go down if you borrow more against your home, or if your home’s value goes down, or both.

If you have $150,000 in home equity and you take out a $50,000 HELOC, your home equity goes down to $100,000. 

Likewise, if you have $150,000 in equity and your property value drops by $10,000, your equity goes down to $140,000.

If your mortgage debt is greater than your home’s value, you have negative equity. People often call it being upside down or underwater on a mortgage. 

Home equity can be low for several reasons:

• Falling home prices

• Small down payment

• Borrowing against the home

• Early years of the mortgage

How can you use home equity?

Home equity could provide access to money when you need it. You could borrow against your home equity using a home equity loan or a home equity line of credit (HELOC).

You can use the money from a home equity loan or HELOC for pretty much any purpose. Say you have a dream kitchen remodel in mind or you’d like to add a deck. You might have necessary home repairs and maintenance on the radar, like replacing a boiler or exterior painting. When you borrow against your home, you’re free to use the money toward your goals, including paying down other debts. 

Both a home equity loan and a HELOC use your home as collateral, with one key difference. The mechanics of a HELOC mean it’s a revolving line of credit. In other words, you can borrow, make payments, and borrow again during a draw period, which often lasts five to 10 years.

Compared to personal loans and credit cards, home equity loans and HELOCs typically have lower interest rates. Here are some reasons you may want to borrow against your home equity: 

• Debt consolidation. If you have high-interest credit card debt or other debts, a home equity loan could help you pay them off. Consolidating debts with a home equity loan could leave you with fewer monthly debt payments and potentially save you money on interest. 

• Home renovations. Want to upgrade your kitchen? Time for a new roof? You could use a home equity loan to pay for home renovations or repairs.

• Major purchases. A home equity loan could help you cover large expenses. Your equity could help cover smart upgrades on your home or pay for medical expenses not covered by insurance.

How much you can borrow using home equity depends on the lender. Lenders generally prefer that you maintain at least 15% to 20% equity in your home after your home equity loan or HELOC.

Is home equity the same as a HELOC?

No, home equity isn’t the same as a HELOC. A HELOC is a revolving line of credit that uses your home equity as collateral. HELOCs are a way of using your home equity to borrow money.

Access your home equity with Achieve

If you’re interested in using your home equity, Achieve Loans offers a fixed-rate HELOC with terms of up to 30 years. Because it’s a HELOC, it’s a flexible way to borrow. You can use the money for almost anything, and you can borrow, pay down your balance, and borrow again during the draw period.

To learn more about your options, check rates with no impact to your credit score. You can figure out how much the monthly payments could be and decide if a HELOC fits your financial goals.