What is home equity? A complete guide for homeowners

Buying a home gives you more than a place to live – it's a financial asset whose value grows as you build equity. What's equity? It's the gap between what your home is worth and what you owe on it. Every mortgage payment builds equity, as does any increase in your home's fair market value. Here's a closer look at how equity works, how to build it, and what you can do with it.

What is home equity?

Think of equity as the portion of your home that you own outright. Your equity is calculated by subtracting what you still owe on your mortgage from your home's current fair market value.

While your equity is a part of your overall net worth, it's not a liquid asset. You can't access it the way you can withdraw cash from an ATM. Equity is tied up in your property until you either sell your home or take out a loan against it.

How does home equity work?

You build home equity in two ways:

• Paying down your mortgage balance
• Increasing your home’s market value

A portion of your monthly mortgage payment covers the interest that has accrued since your last payment, and the rest pays down the principal. This is calculated using a process called amortization. As you pay down your principal balance, you build equity by reducing the amount you owe on your home.

At the same time, real estate generally appreciates over the long term. When the value of your home increases, you gain equity because your home is worth more compared with what you owe.

You can realize the value of equity in a couple of ways. One is to sell your home. The proceeds from your sale will be used to pay off your current mortgage, and the difference, or equity, is your profit.

You also can borrow your equity using your home as collateral, which can secure favorable loan terms, such as a lower interest rate. This is most often done through a cash-out refinance or a second mortgage. Since you're using your home as collateral, defaulting on the loan can result in foreclosure.

Lenders usually limit how much of your equity you can borrow. You usually must keep 10% – 20% equity in your home.

How to calculate your home equity

To calculate your home equity, take your home's estimated current market value and subtract your outstanding mortgage balance. You also can use the home equity calculator from Rocket Mortgage.

To estimate your home's current value, look at recent sales of comparable properties in your neighborhood, use online real estate valuation tools, or hire an appraiser.

If you apply for a loan, the lender will require a professional appraisal, and their calculation may differ slightly from your estimate.

Your equity is typically expressed as both a flat dollar amount and a percentage of the home's overall value. For example, if your property is currently worth $400,000 and you owe $300,000 on your mortgage, your equity is $100,000. This means you have a 25% equity stake in your home.

Common ways to use your home equity

There are several practical ways for homeowners with equity to finance their larger financial goals. Leveraging the equity you have can help you fund significant life events or streamline your finances. Here is a look at why people explore what you can use a home equity loan to accomplish.

Remove private mortgage insurance (PMI)

If you bought your home with less than a 20% down payment on a conforming conventional loan, you must pay for private mortgage insurance (PMI) each month. Once your equity reaches 20% of your home's original purchase price or current appraised value, you can get rid of PMI and reduce your mortgage payment. If your home's value has increased quickly since you bought it, you may be able to refinance it with more equity and cancel PMI.

Make home improvements

Many homeowners borrow equity and reinvest it directly into their property to further increase its value. Renovations, remodeling a kitchen, or replacing an aging roof can make your home more comfortable while boosting its market value. If you borrow against your equity and use the funds to improve your home's value, the interest is typically tax-deductible.

Cover large expenses

Because home-secured loans typically offer lower interest rates than unsecured personal loans, borrowing equity is often used to cover large expenses. This might include college tuition, wedding expenses, or unexpected medical bills.

Consolidate high-interest debts

Homeowners who have hefty credit card balances can use their equity to consolidate their debt. By using a lower-interest home loan to pay off high-interest debts, you can simplify your finances and save on overall interest charges.

How can you access your home equity?

If you want to access the equity you’ve built to get financing, here are some of your options.

Cash-out refinance

A cash-out refinance replaces your current mortgage with a new one based on your home's current market value.¹ After you pay off your current loan, you keep the difference and repay it as part of your new mortgage. You'll have one monthly mortgage payment, but your new loan will have a different interest rate and repayment term.

Home equity loan

A home equity loan is a second mortgage.² Instead of replacing your primary mortgage, you take out an additional loan using your equity as collateral. Securing your loan with your equity helps you access a lower interest rate than you would with other loans. A home equity loan provides a one-time lump sum of cash up front, usually with a fixed interest rate and a predictable monthly payment.

Home equity line of credit (HELOC)

Like a home equity loan, a HELOC is a second mortgage. A HELOC is secured using your home as collateral, but it functions more like a revolving credit card. You are given a maximum credit limit that you can draw from as needed during a designated draw period, after which you repay the amount borrowed. HELOCs typically have variable interest rates, so your monthly payments can fluctuate over time with market rates.

Rocket Mortgage currently doesn't offer HELOCs.

Reverse mortgage

If you're over 62 and would like to boost your retirement savings, you may want to consider a home equity conversion mortgage, also known as a reverse mortgage. A reverse mortgage converts your equity into cash without having to make monthly mortgage payments. With a reverse mortgage, your loan amount is based on the amount of equity you have in your home. If you have an existing mortgage, the proceeds of the loan are used to pay it off. The remaining balance is available for you to use as you see fit.

A reverse mortgage can be a good choice for homeowners who plan to stay in their home indefinitely and aren’t worried about leaving an inheritance. The loan balance typically becomes due when the last surviving borrower moves out, sells the home, or passes away.

How to increase your home equity

To increase your home equity, you can pay down your principal, wait for your home value to increase, or make renovations or upgrades.

Pay down your principal

Every time you make a mortgage payment, you gain equity in your home. At the very beginning of your mortgage repayment, you gain equity slowly because most of the money you pay in the first few years goes toward interest instead of your mortgage’s principal.

As you pay down your balance, a larger portion of your monthly payment goes toward the principal rather than interest. You also can make extra principal-only payments. This helps you build equity faster toward the end of your loan term.

If you want to build equity faster in the first few years of your mortgage, you can pay more than your minimum monthly payment. Just tell your lender that the extra money should be applied to your principal.

Wait for your home value to rise

Real estate generally appreciates over the long term. For those living in homes with equity, simply maintaining the property and letting natural market forces do their work will gradually increase your home's value and your equity.

Unfortunately, this process also works in reverse. If your local housing market takes a turn for the worse and the value of your property decreases, your equity decreases as well. The amount you’d owe on your mortgage wouldn’t change, but your equity in the property would.

Make renovations or upgrades

Another common way homeowners can increase their home equity is by completing renovations that boost their home's value. These renovations could include building a larger living room, adding a bathroom, or upgrading the kitchen. By increasing the value of your home, you also can increase the amount of equity you have. If you are considering this path, using a home equity loan for a remodel can help you fund the types of upgrades you want.

Is using your home equity a good idea?

Tapping into your property's value can be a highly effective way to access cash in the right circumstances. However, it is also a big financial decision that comes with distinct advantages and inherent risks.

Pros

Some of the benefits of tapping into your home equity include:

• Lower interest rates. Home equity loans, HELOCs, and cash-out refinances typically have lower interest rates than credit cards and personal loans.
• Few restrictions on use. Lenders usually allow you to use your home equity loan to cover any expenses you deem necessary.
• Some tax benefits. If you're using the money to help cover the cost of home repairs or home improvements, you can deduct a portion of the interest you pay on your taxes. This can reduce how much you'll owe the IRS at the end of the year.

Cons

Using your home equity also comes with the following risks and downsides:

• Puts your home at risk. Home equity loans, lines of credit, and cash-out refinances are secured by your home. If you fail to make payments on time or default, you risk losing your home.
• May give you an extra monthly payment. Unless you’re using a cash-out refinance, you’ll end up with two payments due every month. This can make it harder to stay on top of your finances.
• Required closing costs. You typically pay closing costs when you take out a home equity loan, HELOC, or cash-out refinance. Closing costs generally range from 3% - 6% of the loan amount.

FAQ

Here are answers to common questions about home equity.

How fast does a home build equity?

Home equity grows at different rates depending on your mortgage payments, interest rate, loan term, home price trends, and changes in the property's condition. Early in your loan term, a smaller portion of each payment goes toward the principal, meaning equity builds relatively slowly. However, as your loan amortizes over the years, a larger portion of each payment goes toward principal, and your equity generally grows much more quickly.

How much equity can a homeowner typically borrow?

Your borrowing limit depends on your equity, your lender's requirements, and your credit score. Lenders typically require you to maintain a certain equity percentage in the home after borrowing – often 10% to 20% of its value.

Is home equity considered part of net worth?

Yes, home equity is typically included in a homeowner’s total net worth. Your net worth is your total assets minus your total liabilities. While your equity is an asset that contributes to your overall wealth, remember that it is not a liquid asset you can spend immediately.

The bottom line: Home equity is a valuable tool when used wisely

Your home equity represents your hard-earned ownership in your property. Whether you choose to let it grow for long-term financial stability or actively leverage it to fund renovations or consolidate debt, it is a powerful resource that can support your financial goals when accessed responsibly.

Take the time to thoroughly understand how your equity works and review your budget before borrowing against it. If you have weighed your options and decided that using your equity is the right fit for your needs, you can explore your choices and start your application with Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

² Home Equity Loan product requires full documentation of income and assets, credit score and max loan-to-value (LTV), combined loan-to-value (CLTV), and home equity combined loan-to-value (HCLTV) ratios. Requirements were updated 11/19/25 and are tiered as follows: 680 minimum FICO with a max LTV/CLTV/HCLTV of 80%, 700 minimum FICO with a max LTV/CLTV/HCLTV of 85%, and 740 minimum FICO with a max LTV/CLTV/HCLTV of 90%. Your debt-to-income ratio (DTI) must be 50% or below. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Product is a second standalone lien and may not be used for piggyback transactions. Product not available on Ameriprise products. Guidelines may vary for self-employed individuals. Some mortgages may be considered “higher priced” based on the APOR spread test. Higher‑priced loans in the State of New York are subject to additional regulatory requirements. Additional restrictions apply. This is not a commitment to lend.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.