What Is Home Equity And How Can I Access It?

Apr 18, 2024

8-minute read

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A large brick house surrounded by trees.

If you use a mortgage to help purchase a home, it will take years of paying off the loan before you own the home outright. However, as you pay it back, you increase the percentage of your home that you do own. That’s where home equity comes in.

The portion of your home that you own is known as home equity. Equity can be a powerful financial tool that you can use to pay off debt, renovate your home or make other financially savvy decisions.

What Is Home Equity?

Home equity is the amount of your home that you actually own. Specifically, equity is the difference between what your home is worth and what you owe your lender. As you make payments on your mortgage, you reduce your principal – the balance of your loan – and you build equity. Once you have enough equity built up, you can access it by taking out a home equity loan or home equity line of credit (HELOC), or by using a cash-out refinance.

If you still owe money on your mortgage, you only own the percentage of your home that you’ve paid off. Your mortgage lender owns the rest until you pay off your loan.

How Does Equity Work?

When you purchase a home, the down payment you make instantly becomes your equity stake in the home. For example, if you make a 5% down payment, your starting equity is 5%. If you make a larger down payment, your equity percentage is higher.

As you pay back the loan, the balance on your loan decreases and your equity increases. Every payment you make slightly increases your equity.