How much of your home do you actually own? You may be the owner of your house, but many homeowners are in various stages of paying off the purchase of their property, so another party has a financial stake in it as well. That means your home equity is a work in progress. What is equity? Finding out will help you understand how your financial relationship with your home changes over time—and how it benefits you as your stake in it increases.
What is equity?
Home equity is your financial stake in your home. Essentially, it’s how much of the home value you’ve already paid for, versus how much your mortgage lender is still financing.
Your equity in your home is constantly changing. It’s low at first and then increases over time as you pay down more of the principal on your mortgage. You could gain equity or lose equity depending on whether you pay down your loan or take out a second mortgage and whether the value of your home goes up or down. You can also leverage your home equity to buy other things. But before thinking about doing so, it’s a good idea to find out what your equity is.
How do I calculate my home equity?
- Figure out your property’s value.
To get an idea of how much equity you have, you’ll first need to find out your property’s market value. One way to do this would be to check your Zestimate on Zillow. Another would be to look up recently sold homes similar to yours in your area. You might find that your property’s value is about what you paid for it. But your property’s value could have risen or fallen as well. This depends largely on the current market.
- Find out how much you owe.
You can find out how much is left on the balance of your mortgage on your monthly statement, or even on an online portal if your mortgage lender offers one. If you can’t find this info on your own, call your mortgage lender, and they can help you.
- Do the math.
Next, subtract your loan balance from your property’s value. What you have left is your home equity. Let’s say your house is worth $250,000, and you owe $200,000. Your home equity is $50,000. Your home equity increases as you pay down the loan. It also increases if your property’s value rises—from home improvements, market conditions, or both.
- Check market conditions and adjust.
Let’s say your home appreciates in value from market conditions. “You build equity without doing a thing,” says Dan Thompson, owner and founder of Wise Money Tools. “Suppose the home you bought for $100,000 could now sell on the market for $120,000 because the market value has increased. You just added $20,000 in equity simply being the owner.” On the flip side, your equity decreases if you take out a second mortgage or if your property’s value falls. Depending on when you plan to utilize your home equity, you’ll want to monitor market trends to forecast how your home value may continue to change.
How can I access my home equity?
- Choose the right purpose for using home equity. Although home equity represents cash, it isn’t liquid, meaning you can’t buy box seats for your favorite sporting event or a new wardrobe with it. And that’s probably a good thing since those aren’t good uses for home equity. Typically, people use their home equity to fund their next home when they move, improve their existing house, finance a college education, pay off credit card debt, invest in the stock market or real estate, get a reverse mortgage for retirement, go on vacation, or buy a car.
- Take out a home equity loan.
You can take out a home equity loan (also called a second mortgage) when you want to use the equity in your home. With a home equity loan, you get a lump sum payment to use any way you like. Note that you must repay the loan with interest (usually a fixed rate), just as you pay your first mortgage or car loan. “Failure to pay can mean foreclosure on your home, so use a home loan wisely for purchases,” says Thompson. You can typically get a large home equity loan—if you have adequate equity—since your house is the collateral. Another benefit: The interest rates are usually lower with home equity loans than they are with credit cards or personal loans.
- …OR, take out a home equity line of credit.
Another way to access your home equity is with a home equity line of credit (HELOC). With a HELOC, you get approved for a certain amount, but you use only what you need. You use a HELOC as you would a credit card. You must also pay back the money you borrow with a HELOC, and the interest you pay is usually a variable rate, which means it can change over time—like marriage—for better or worse.