What equity is
Home equity = your home's current market value − what you still owe on it.
| Home value | Mortgage balance | Equity | Equity % |
|---|---|---|---|
| $400,000 | $300,000 | $100,000 | 25% |
| $400,000 | $240,000 | $160,000 | 40% |
How equity grows
- Paying principal. Every mortgage payment chips away at what you owe. Early on, most of the payment is interest, so this is slow at first.
- Appreciation. If local values rise, your equity rises with them. If they fall, equity can shrink.
- Improvements. Some projects raise market value, though rarely dollar-for-dollar.
Ways people borrow against equity
Home equity loan
A lump sum at a usually fixed rate, repaid in fixed monthly payments. Predictable, and suited to one-time costs.
HELOC (home equity line of credit)
A revolving line you draw from as needed during a draw period, usually at a variable rate. Flexible, but payments can rise.
Cash-out refinance
Replaces your current mortgage with a larger one and pays you the difference. This can make sense when new rates are similar to or lower than your existing rate.
The trade-offs
- Your home is the collateral. If you can't repay, you could lose it to foreclosure.
- Closing costs and fees can add up, so compare the APR, not just the rate.
- Lenders limit how much you can borrow, often to a combined loan-to-value of around 80–85%.
- Variable rates on HELOCs can rise over time.
Borrowing against your home is a big decision. Make it for a clear purpose, not because the equity is there.
Questions to ask before you borrow
- What exactly is the money for, and is there a cheaper way to pay for it?
- Can I afford the payment if rates rise or my income drops?
- What are all the fees, and is there a prepayment penalty?
- How does this affect my plans to sell or move?
Homesguide is not a lender and does not offer loans. This guide is general information, not financial advice. Talk to a licensed loan officer or financial advisor about your situation.
This guide is general, educational information, not professional advice. Rules, prices, and incentives vary by location and change over time. Confirm details with a licensed professional.