Your home can be more than a place to live. Over time, it can also become an important financial asset. As you make mortgage payments and your property’s value changes, you may build home equity, which represents the portion of your home that you effectively own.
For many homeowners, equity can become a valuable financial resource. It may play a role when you’re considering mortgage refinancing, a cash-out refinance, purchasing another property, or funding major home improvements.
In this guide, we’ll explain what home equity is, how to calculate it, what can cause it to grow or decrease, and how you may be able to use it.
What Is Home Equity?
Home equity is the portion of your home that you truly "own" free and clear of any debts. In financial terms, home equity is the portion of your property’s value that you own. You calculate it by taking your home’s current market value and subtracting what you still owe on your mortgage and any other debts secured by the property.
As you make mortgage payments or as property values rise, your equity increases, turning your home into one of your most valuable financial assets.
Your equity is not necessarily the same as the amount you have paid toward your mortgage. Home values can rise or fall over time, which means appreciation or depreciation can have a significant effect on your equity.
This is why understanding your current home value is just as important as knowing your remaining mortgage balance.
How Is Home Equity Calculated?
Calculating home equity is relatively simple if you know your home's current value and your remaining mortgage balance.
The basic formula for home equity is straightforward:
Home Equity = Current Home Value − Outstanding Mortgage Balance
1. Determine Your Home's Current Value
Start by finding out what your home is worth today. This may be different from the price you originally paid for the property.
For example, you may have purchased a home for $400,000 several years ago. If similar properties in your area have increased in value, your home could now be worth $475,000.
A professional appraisal can provide an estimate of the property's market value. Depending on the situation, lenders may also use an appraisal, automated valuation model, or another property valuation method.
2. Check Your Remaining Mortgage Balance
Next, look at your current mortgage statement to determine how much principal you still owe.
Keep in mind that your monthly mortgage payment usually includes more than principal. It may also include interest, property taxes, homeowners insurance, and other costs.
Only the amount you still owe on the mortgage principal is used when calculating your home equity.
3. Subtract the Mortgage Balance From the Home Value
Once you have both numbers, use the home equity formula.
For example:
Current home value: $600,000
Remaining mortgage balance: $420,000
Home equity: $180,000
So, you have approximately $180,000 in equity in the property.
Tip: For a deeper understanding of how mortgage payments are structured, you can look at this guide on understanding mortgage basics.
How Much Equity Can You Borrow?
Having $200,000 in home equity does not necessarily mean you can borrow $200,000.
Lenders generally do not allow borrowers to access 100% of their home's equity. The amount you may be able to borrow depends on the loan program, property value, existing mortgage balance, credit profile, income, debt obligations, and applicable lender guidelines.
For example, suppose:
Home value: $600,000
Current mortgage balance: $350,000
Existing equity: $250,000
You may have $250,000 in equity, but the amount available through a cash-out refinance or other equity-based financing will depend on the maximum permitted loan-to-value ratio and the specific loan program.
This distinction is important: home equity is not the same as available borrowing power.
How to Access and Use Home Equity
Because equity is tied up in physical real estate, it is an illiquid asset. However, homeowners can convert equity into cash through several financial vehicles:
How Can You Build More Home Equity?
There are several ways homeowners may build equity over time.
1) Make Regular Mortgage Payments
Every time you reduce the principal balance of your mortgage, you generally increase the amount of the property you own outright, assuming the property value remains unchanged.
2) Make Additional Principal Payments
Some homeowners choose to make additional payments toward their mortgage principal. Paying down principal faster can increase equity more quickly, although you should first consider your broader financial priorities and whether your mortgage allows any particular payment restrictions or penalties.
3) Make Value-Adding Improvements
Certain improvements may increase a home's market value. However, not every renovation will add the same amount of value, and renovation costs do not automatically translate into an equivalent increase in home value.
If you're considering renovations, focus on projects that make financial and practical sense for your property and local market.
For more guidance, learn how to plan the right mortgage strategy in today's market and understand how different factors can influence your mortgage decisions.
Can Home Equity Decrease?
Yes. Home equity is not guaranteed to increase. If property values decline, your equity can decrease even if you continue making mortgage payments.
For example, suppose your home is worth $500,000, and you owe $350,000. Your equity is $150,000.
If the home's value falls to $450,000 while your mortgage balance remains $350,000, your equity would become:
$450,000 − $350,000 = $100,000
This is why home equity depends on both your mortgage balance and the current value of your property.
Related Articles:
How Much House Can I Afford as a First-Time Homebuyer?
How to Find the Right Family Home
How Houses Actually Get Appraised (And Why It Matters)
How Convoy Home Loans Supports Your Mortgage Goals
Understanding your home equity is only the first step. What matters next is how it fits into your financial goals. Convoy Home Loans can help you evaluate your options based on your individual circumstances.
Buying a home: If you're ready to purchase a home, we can help you explore mortgage options that fit your financial situation.
Refinancing your mortgage: If your financial circumstances or goals have changed, you may want to consider a mortgage refinance and compare the potential benefits and costs.
Accessing home equity: If you've built substantial equity, a cash-out refinance may be one option for accessing a portion of that equity, depending on your qualifications and loan program.
Financing an investment property: If you're considering real estate investing, investment property financing may help you evaluate financing options based on the property and your investment goals.
Considering your overall financial picture: The amount of equity you have is only one factor. Your credit profile, income, existing debts, property value, loan-to-value ratio, interest rate, loan program, and long-term goals can all influence which option may be appropriate.
Ready to explore your options? Connect with Convoy Home Loans to get started.
