Home equity is the difference between your home’s market value and what you owe on your mortgage. As of Q4 2024, US homeowners collectively hold over $34 trillion in equity. In fact, the average homeowner has more than $313,000 in available equity!
If you build equity, you can secure a home equity loan, HELOC, or cash-out refinance for major expenses. However, it’s key to understand how equity works, how to build it faster, and the risks involved in borrowing against it.
What Is Home Equity?
Home equity is the difference between your home’s market value and the amount you still owe on your mortgage. It’s the portion of your home that you truly own.
Your equity in a house grows as you pay down your loan, or if your property value increases. You can tap into it through options like home equity loans or lines of credit.
How Does Home Equity Work?
Home equity isn’t just a number—it’s a financial asset that grows over time. As you make mortgage payments and reduce your loan balance, your equity increases automatically.
Market conditions also impact your equity. If home prices rise, your equity increases without you making extra payments. On the flip side, if property values drop, your equity could shrink.
How to Calculate Your Home Equity
It’s simple! You just need to know two key numbers: your home’s current market value and your remaining mortgage balance. Here’s the formula:
For example, if your home is worth $400,000 and you still owe $250,000 on your mortgage, your equity in house is $150,000.
Remember, property values fluctuate. To stay informed about your equity position, calculate your home’s worth with Houzeo, America’s best home buying website.
5 Ways to Build Home Equity Faster
Whether you want to borrow against it or sell your home for a profit, building equity in real estate can put you in a strong financial position. Here are some strategies:
- Make Extra Mortgage Payments: Even small additional payments toward your principal can accelerate your equity growth and reduce interest costs.
- Opt for a Shorter Loan Term: A 15-year mortgage builds equity on a house faster than a 30-year loan, since more of your payment goes toward the principal.
- Increase Your Home’s Value: Strategic home improvements, like kitchen upgrades or energy-efficient features, can boost your property’s worth.
- Make a Larger Down Payment: A bigger upfront payment gives you more equity in a home from day one.
- Avoid Refinancing Too Often: A cash-out refinance can reduce your equity, so consider whether it’s the right move for your long-term goals.
How to Use Home Equity
Home equity is a financial tool you can leverage in several ways. Here’s how:
- Home Equity Loans & HELOCs: Borrow against your equity through a home equity loan (a lump sum) or a home equity line of credit (HELOC) for flexible access to funds.
- Home Improvements: Increase your home’s value by using equity to fund renovations like bathroom remodels, landscaping upgrades, or a new roof.
- Debt Consolidation: Pay off high-interest debts, like credit cards or personal loans, with a lower-interest home equity loan.
- Education Expenses: Cover tuition or other education costs with a home equity loan instead of higher-interest student loans.
- Emergency Fund: A HELOC can serve as a financial safety net, as it offers access to cash whenever you need it.
Pros and Cons of Borrowing Against Home Equity
✅ Pros
- Lower Interest Rates: Tap into home equity loans or HELOCs to benefit from lower interest rates compared to credit cards and personal loans
- Flexible Use of Funds: Use the money for home improvements, debt consolidation, education, or even as an emergency fund.
- Potential Tax Benefits: You may be able to deduct interest on your home equity loan if you use it for home improvements. Consult a tax professional to know more.
- Boosts Home Value: If you invest in renovations, you can build more homeowner equity and increase your property’s worth over time.
❌ Cons
- Your Home Is Collateral: If you can’t repay the loan, you risk foreclosure.
- Increases Debt Load: Borrowing against home equity adds to your overall debt, and impacts your financial security.
- Market Fluctuations: If home values drop, you could owe more than your home is worth.
- Upfront costs: Home equity loans come with closing costs, which can reduce your available funds.
Can You Use House Equity to Buy Another Property?
Good news, you can! Home equity is a low-interest way to finance another property. Many homeowners tap into their equity through a home equity loan, HELOC, or cash-out refinance to fund a down payment. You can even purchase an investment property outright.
However, your home is collateral, so missed payments could put it at risk. Ensure you can manage the extra debt before borrowing. It’s also important to consider market conditions, rental income potential, and how the new property fits into your long-term financial goals.
Should You Use Home Equity?
Absolutely! Home equity is a powerful financial asset that can significantly enhance your financial flexibility and growth. As your home value appreciates over time, your equity increases. This gives you access to low-interest borrowing options for a wide range of purposes.
Whether you use your equity for home improvements, debt consolidation, or to buy another property, it’s important to borrow responsibly. Since your home is collateral, make sure you can manage the payments and protect your investment.
