Definition
Home equity
Home equity is the portion of a home the owner owns outright: its current market value minus the balances of every loan secured by it. Equity grows as the mortgage is paid down and as the property appreciates, and it shrinks if values fall or the owner borrows against the home.
The formula is simple: market value minus mortgage balance minus any other liens such as a HELOC or home equity loan. As a percentage, equity is the complement of combined loan-to-value.
Worked example. A home is worth $450,000. The first mortgage balance is $270,000 and there is no second lien. Equity is $180,000, or 40% of the value. If the owner adds a $40,000 home equity loan, equity falls to $140,000, about 31%.
Equity builds through three channels: the down payment, principal reduction through amortization or extra payments, and appreciation. Early in a 30-year loan, payments add equity slowly because most of each payment is interest. Improvements can add value, though rarely dollar for dollar.
Lenders never let owners borrow all of it. Cash-out refinances, HELOCs and home equity loans each have CLTV caps that leave a cushion. Equity is also not the same as cash in hand at sale: selling costs such as commissions, transfer taxes and repairs can absorb a meaningful share. When a sale is near, a borrower's real net equity is usually lower than the headline number. The home equity loan calculator shows equity alongside the maximum available.
Calculators that use this term
FAQ · 2 questions
Questions about Home equity
How do I calculate my home equity?
Subtract every loan balance secured by the home from its current market value. A recent appraisal or comparable sales give the most reliable value.
How much of my equity can I borrow?
Lenders typically cap combined loans at a set percentage of value, so you can borrow only the equity above that cushion. The cap varies by product and lender.
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