What is home equity?
Home equity is the portion of your home's value that you own. In other words, it's the difference between your home's current worth and what you owe on the mortgage. As time passes — and mortgage payments are made — your equity grows.
- Equity = Value of the home - Debts on the loan
For example, if your home's current market value is $180,000 and the mortgage balance is $100,000, you own $80,000 of equity. When the principal balance is zero, you own 100% equity in the home.
Beyond representing how much of the home you own, equity is also a valuable asset for homeowners. Homeowners have a plethora of home equity products to choose from. They can use the equity in their home to meet different financial needs, like repaying taxes and insurance or combining debts.
How to calculate your home equity
Determining home equity is simple:
- Gauge your home's estimated market value: You can use online tools — such as Zillow Zestimates or Redfin — to find estimates. Alternatively, you can work with a licensed real estate agent or appraiser for a more accurate assessment of your home value.
- Subtract debts owed: Subtract any debts associated with the property — such as the mortgage balance and liens — from the market value.
How can you build home equity?
The more home equity a mortgage holder has, the more financial security they have — particularly when it comes time to borrow money or cash in. Therefore, in addition to learning what is equity in a home, it's crucial to know how to increase it.
- Make larger or additional mortgage payments
Paying down your mortgage is one of the most effective ways to increase the amount of equity you own. By making extra payments on the mortgage loan, a higher amount will go to paying off the principal rather than the interest — growing your equity faster.
- Invest in home improvements
In addition to paying down what is owed, increasing the value of your property can help boost equity. For example, projects such as a kitchen remodel or adding an ADU can add significant value. However, before jumping into upgrades, be sure the cost of renovations offsets the added value.
- Wait for home value to rise
Since equity is tied to the appraised value of your home, micro and macro factors can impact it. For example, if your neighborhood is deemed a hot market, you'll likely experience a boost in the value of your home. Similarly, negative changes will also affect equity, such as market crashes and dips. Therefore, it's best to be proactive in growing your equity.
How can you use your home equity?
There are plenty of reasons homeowners choose to access their home equity. Some common motivations include:
- Debt consolidation: Debt consolidation is a smart way to reduce high-interest debt. Home equity loans offer better rates than other consumer loans. Therefore, it is a great option for debt consolidation.
- Home renovations: Home improvements can get costly, but leveraging your equity to cover the expenses can keep interest fees low. Equity can help finance remodels to help homeowners age in place or make value-adding improvements.
- Investing in yourself: Small business owners and entrepreneurs can harness their home equity to fund their businesses or subsequent investment pursuit.
- Tuition: Tapping your home wealth can help pay down existing loans or help children with upcoming costs.