What is home equity, and how does it work?

Homeownership is an accomplishment that takes hard work and discipline, and it comes with a financial perk: the home equity you’ve built over time. 

Home equity is the portion of your home’s value that you actually own. To calculate it, subtract what you owe on your mortgage from your home’s current market value. As you pay down your mortgage or your home’s value increases, your home equity grows.

Here’s what home equity means and how you might use it. 

Home equity definition

Home equity is the difference between what your home might sell for if you listed it today and the remaining balance on your mortgage. In other words, your home equity is the portion of your home that you currently own. Home equity is like an invisible savings account that builds up behind the scenes as you pay your mortgage each month. 

Your home equity can change over time. As you pay down your mortgage or your home’s value rises, your equity could grow. More equity could help you qualify for certain borrowing options, such as a home equity loan.

How does home equity work?

To understand what equity in a home is, think of it as the difference between your home’s current value and the amount you owe on your mortgage. You start building home equity when you buy a home and make a down payment. The larger your down payment, the more home equity you have from Day One of moving in, and the more of your home you own from the start.

Each mortgage payment reduces your mortgage debt and could add to your equity. If you make extra mortgage payments to pay down principal, this can build home equity faster. Your equity might also grow if your home’s value rises over time. Changes in the housing market could affect your home’s value and the amount of equity you have.

Let’s say you buy a home for $350,000 and with a down payment of $50,000. This down payment lets you start with $50,000 in home equity. Over the next few years, you pay down your mortgage balance from $300,000 to $275,000, while your home’s value increases to $375,000. Your home equity is now $100,000 ($375,000 home value minus the $275,000 mortgage balance). Just by paying the mortgage for a few years, you doubled the amount of home equity from your original down payment. 

Home equity is not guaranteed. Home prices don’t always go up. Different housing markets might experience higher or lower rates of growth in home values. Home equity loan lenders might not value your home as highly as you had estimated. If your home needs costly repairs and overdue maintenance, or you sell your home during a downturn in your local housing market, you might not have as much home equity as you expected. 

But in general, most homeowners can expect to build home equity over time by staying in their home for several years and steadily making mortgage payments. 

What does it mean to use your home equity?

Using your home equity generally refers to turning that equity into cash. One of the most common ways to access home equity is to borrow against it with a home equity loan. If you need cash for a major expense, tapping into your home equity is often a financially smart, flexible way to do it. 

Home equity loans can be a lower-cost way for many people to borrow. That’s because home equity loans tend to have lower interest rates, since the loan is secured by the home. You might get a lower interest rate with a home equity loan than you’d get from a personal loan or many other types of loans.  

Selling your home is another way of using home equity. After you pay off your remaining mortgage and closing costs, you receive home equity as the profits of the sale of the home. This home equity then becomes money you can use however you like.

How do you calculate home equity?

To calculate home equity, subtract your remaining mortgage balance from your home’s current market value.

Home equity formula: Home value - mortgage balance = home equity

For example, if your home is worth $300,000 and you owe $220,000 on your mortgage, you have $80,000 in home equity. Here’s the calculation:

Home value ($300,000) - Mortgage balance ($220,000) = Home equity ($80,000)

You can get an estimate of your home’s value using online home value estimators from real estate websites. Keep in mind that this is not a guarantee. Lenders typically use a professional appraisal when determining your home’s value for a home equity loan. 

What are the risks of borrowing against home equity?

When you borrow against your home equity, your home secures the loan. If you’re unable to repay the home equity loan as agreed, you could lose your home. This is the same type of risk as a purchase mortgage; failing to repay the loan can lead to foreclosure. 

Another risk of home equity loans is that home equity can decrease if you borrow against your home or if your home’s value declines. For example, if you have $150,000 in home equity and take out a $50,000 home equity line of credit (HELOC), your equity drops to $100,000.

Likewise, if you have $150,000 in equity and your property value drops by $10,000, your equity decreases to $140,000. This gives you less flexibility to borrow against your home’s value, because your home is worth less than before. If your home value decreases, home equity loans can become more risky for you, because you’re borrowing against a smaller amount of home value, and driving up your loan-to-value (LTV) ratio that lenders use to decide whether and how much you could borrow against the home.

If your mortgage debt (including your first mortgage and any home equity loan) becomes larger than your home’s value, you have negative equity. Some people call this being upside down or underwater on a mortgage. This situation is risky, because it could make it harder for you to sell your home for the amount you need to pay off the debt against it. 

How can you use home equity?

You could borrow against your home equity with a home equity loan or a home equity line of credit (HELOC).

You can typically use funds from a home equity loan or HELOC for a variety of expenses, such as home improvements, debt consolidation, or major purchases. Because these loans use your home as collateral, it’s important to make the right choice for your finances. 

A home equity loan provides a fixed loan amount, usually with a fixed interest rate and predictable payments, just like a purchase mortgage. It could make sense when you know exactly how much you need to borrow, such as for a planned home renovation or debt consolidation. 

A HELOC works differently because it’s a revolving line of credit. Instead of fixed loan payments each month, a HELOC works kind of like a credit card, with more flexible borrowing and repayment. A HELOC could be useful for ongoing expenses or uncertain amounts, because when you have one, you can borrow, repay, and borrow again during the draw period, which often lasts five to 10 years.

Compared with credit cards and some personal loans, home equity loans and HELOCs might have lower interest rates. Here are some common reasons homeowners choose to borrow against their equity:

• Debt consolidation. If you have high-interest credit card debt or other debts, a home equity loan could help you consolidate multiple balances into a single monthly payment. Debt consolidation with a home equity loan could reduce your monthly debt payments and save you money on interest. 

• Home renovations. Want to upgrade your kitchen? Time for a new roof? You could use a home equity loan to pay for home renovations or repairs.

• Major purchases. A home equity loan could help you cover large expenses. Your equity could help cover smart upgrades on your home or pay for medical expenses not covered by insurance.

How much you can borrow using home equity depends on the lender. Lenders generally prefer that you maintain at least 15% to 20% equity in your home after taking out your home equity loan or HELOC.

So you want a home equity loan? Here's what to know in 2026

Is a home equity loan the same as your mortgage or a HELOC?

Home equity loans, HELOCs, and the loan you got when you bought your home are all mortgages. 

Your primary mortgage is the original loan you used to buy the home. A HELOC is one way to borrow against that equity, structured as a revolving line of credit. A home equity loan is a one-time loan against your equity. 

A home equity loan or HELOC is a second mortgage if you still make payments on the mortgage you got when you bought your home.  

Home equity is the financial value, the “invisible savings,” that you've built up by owning the home and paying down the mortgage.

Learn more: For a more detailed comparison, refer to our guide on home equity loans vs. HELOCs. 

Access your home equity with Achieve

If you're considering borrowing against your home equity, Achieve Loans offers a fixed-rate HELOC with terms of up to 30 years. Because it’s a HELOC, it’s a flexible way to borrow. You could use the money for almost anything. If you’re approved, you can borrow, pay down your balance, and borrow again during the draw period.

To learn more about your Achieve HELOC options, check rates with no impact on your credit score. This can help you figure out how much the monthly payments could be and decide if a HELOC fits your financial goals.