Home equity
Updated
What is home equity?
Home equity is your home's current value minus everything owed against it. It grows through principal payments and through appreciation.
How it is calculated
Home equity = home value − all balances secured by the home
Home equity questions
- What is equity in your home?
- The share of the property you own outright: what it is worth today, less every balance secured against it. A home worth $400,000 with $250,000 still owed on it carries $150,000 of equity.
- How do you build home equity?
- Two ways, and only two. You repay principal, which lowers the balance, or the property appreciates, which raises the value. Extra principal payments accelerate the first; the second is not something you control.
- How much of your home equity can you borrow?
- Most lenders stop at a combined loan-to-value ratio of 80 to 85 per cent, counting every lien on the property. That ceiling, rather than your total equity, is what limits a cash-out refinance, a HELOC or a home equity loan.
What it means in practice
Equity is not cash. Converting it to cash requires borrowing against it or selling, and both carry costs.
A cash-out refinance, a HELOC and a home equity loan all convert equity into debt. Only the price and the structure differ.
Selling costs such as agent commissions, transfer taxes and repairs reduce the equity you realize, so keep them in mind when comparing scenarios over a short stay.