What is Home Equity?

What is Home Equity?

Home equity is the property value that you hold as a homeowner. Think of your home equity as the current market value of your home, minus any liens you may have against your home.

Market Value - Property Lien(s) = Home Equity

Your equity is an asset that you can access by selling your home. You can also potentially access up to 80% of your equity while still living in your home with a home equity loan.

What is a Home Equity Loan?

A home equity loan allows you to borrow against the available equity in your home. There are a few different types of home equity loans, and each has its own benefits.

1. HELOC - Home Equity Line of Credit acts as a revolving type of credit which allows you to borrow from your home equity in individual transactions, like a spending account. This type of home equity loan typically has a variable interest rate structure similar to credit cards. It allows to borrow from your equity a limited time.
2. Cash-Out Home Equity Refinance - This home equity loan option allows you to take a cash-out option while refinancing the first lien on your home. With a fixed interest rate, a cash-out home equity loan often offers a lower long term interest cost. It also has the benefit of having one monthly mortgage payment, making it a good option for consolidating higher interest debt.
3. Second Mortgage - A home equity loan that is a second a lien on the available equity in your home is commonly referred to as a second mortgage. This type of loan is taken out as a single lump sum, and requires an additional mortgage payment each month. This type of home equity loan offers the least flexibility for home owners, making it the least common choice for a home equity loan.

How Can I Estimate My Home Equity?

In order to determine the amount of equity you hold in your home, you will need to know the current market value of your home. If you are looking for a general estimate, you could look online at the prices of recently sold homes in your neighborhood of similar size and condition.
If you are applying for a home equity loan, an appraisal of the fair market value of your home will be conducted as a part of the loan process.

Once the current market value of your home is known, you can estimate the equity you hold by subtracting any lien amounts. Use our Home Equity Calculator to estimate your potential mortgage payment with a cash-out home equity loan.

80% is a good number to keep in mind when it comes to home equity. If you are considering a home equity loan you can access up to 80% of your home value. You can also drop mortgage insurance costs after your mortgage reaches 80% loan-to-value ratio or less.
 

How Does Home Equity Grow?

Your home equity can grow over time in a few ways. One of the primary benefits of owning a home is the growing value of your property. Investing in home ownership allows you to build equity over time.

Home equity typically grows in these 3 ways:

1. Mortgage Principal Payments: As your pay down the principal balance of your mortgage lien, your equity builds over time.
2. The Market: Housing market conditions can also increase home value. As similar homes in your neighborhood sell at higher prices, your home equity grows with the market.
3. Sweat Equity: The improvements and updates you make to your home can add equity to your home by increasing the market value.

Learn more about “Smart Ways to Use Your Home Equity” in one of our previous articles.

Find answers to some of your other mortgage question on our FAQ page, or in our mortgage Learn center.