Home equity is the portion of your property’s value that belongs to you rather than your lender. To find it, take your home’s current fair market value and subtract everything you still owe against the property. If your home is worth $400,000 and your mortgage balance is $250,000, you have $150,000 in home equity. That figure moves constantly as you pay down the loan, as local prices shift, and as you improve the property.
Equity is the main way homeownership builds wealth, but it isn’t cash until you sell the home or borrow against it. Understanding where the number comes from, what makes it grow, and what it costs to actually access it keeps you from making decisions based on a figure that only looks like money.
How to Calculate Your Home Equity
The formula has two inputs: what the home is worth today, and the total of every balance secured by it. Subtract the second from the first.
The debts to include are your primary mortgage, any second mortgage or home equity line of credit, and any recorded liens such as tax liens or contractor liens. Miss one and your estimate overstates what you own.
Finding Fair Market Value
A professional appraisal gives you the most defensible number. For a standard single-family home with a conventional loan, expect to pay roughly $300 to $400, though government-backed loans and complex properties cost more. A licensed real estate agent can also run a comparative market analysis using recent sales of similar nearby homes. It costs nothing but carries less formal weight than an appraisal.
Your local tax assessment is another reference point, but assessors typically update values on a cycle that can lag actual market conditions by a year or more. Treat the assessed value as a floor estimate rather than a precise measurement.
Finding Your Outstanding Balance
Your most recent monthly mortgage statement shows the current principal balance. That is not the same as your monthly payment amount, which bundles principal, interest, property taxes, and insurance. Look for the line labeled “principal balance” or “outstanding balance.”
If you need the exact amount to close out the loan entirely, request a payoff statement from your servicer. Federal rules require the servicer to send you an accurate payoff figure within seven business days of a written request.1Consumer Financial Protection Bureau. 12 CFR 1026.36 – Prohibited Acts or Practices and Certain Requirements for Credit Secured by a Dwelling The payoff amount is usually slightly higher than the principal balance because it includes interest accrued through the payoff date.2Consumer Financial Protection Bureau. What Is a Payoff Amount and Is It the Same as My Current Balance
A Worked Example
Suppose your home appraises at $450,000. You owe $260,000 on the first mortgage and $15,000 on a home equity line of credit. Your equity is $450,000 minus $275,000, which equals $175,000. That is the cash you would theoretically pocket if you sold today and paid off every lien, before any selling costs.
What Makes Your Equity Grow or Shrink
Equity moves in response to three things: your payments, the market, and what you do to the property itself.
Paying Down the Loan
Each monthly mortgage payment is split between interest and principal according to an amortization schedule. In the early years of a 30-year fixed loan, most of each payment goes toward interest. On a conventional 30-year mortgage, the crossover point where more of your payment goes toward principal than interest typically does not arrive until around year 18 or 19. That front-loading is why equity builds slowly in the first decade of a mortgage. As the loan matures, principal reduction accelerates.
Making Extra Payments
Paying more than the minimum is one of the fastest ways to build equity. When you send extra money designated toward principal, every dollar reduces the balance directly and cuts the interest that would have accrued on it for the remaining life of the loan. On a $200,000 loan at 4% interest, adding $100 per month to the required payment can shorten the loan by more than four years and eliminate over $26,000 in interest. Even switching to biweekly half-payments produces one extra full payment per year, which meaningfully accelerates payoff.
Market Movement
When home prices rise in your area, your equity grows without any effort on your part. A home purchased for $350,000 that appreciates to $400,000 over five years generates $50,000 in equity from market movement alone. But the arrow points both ways. Economic downturns, rising interest rates, or shifts in neighborhood desirability can push values down and erase equity just as quickly. You have no direct control over these forces, which is why treating a home as a guaranteed investment is a mistake.
Improvements
Strategic renovations can increase a property’s appraised value, sometimes by more than the renovation cost. Curb appeal projects tend to deliver the strongest returns; garage door replacements and entry door upgrades routinely recoup well over 100% of their cost at resale. Kitchen and bathroom updates in the mid-range tier typically recover 74% to 96% of the expense. High-efficiency HVAC systems and attic conversions return considerably less in direct resale value, though they may help a home sell faster. Focus on improvements that address genuine deficiencies or match what buyers in your market expect.
Ways to Access the Equity You Have
Equity locked inside a home is useful only if you can tap it. Three tools let you convert equity into cash, each with different mechanics.
Home Equity Loan
A home equity loan is a second mortgage. You receive a lump sum, repay it at a fixed or adjustable rate over a set term, and make a separate monthly payment on top of your existing mortgage.3Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC) Because it sits behind the first mortgage in lien priority, the interest rate is usually higher than what you would get on a primary mortgage. It works well for a one-time expense where you know the exact amount you need.
Home Equity Line of Credit
A HELOC works more like a credit card secured by your home. You get a revolving credit line up to a set limit and draw against it as needed during a draw period that typically lasts 10 to 15 years. You only pay interest on what you actually borrow, and repaying what you drew replenishes the available balance. Once the draw period ends, you enter a repayment period of up to 20 years during which you can no longer borrow and must pay down the balance. Most HELOCs carry variable interest rates, so your payments can fluctuate.3Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC)
Cash-Out Refinance
A cash-out refinance replaces your existing mortgage with a new, larger loan. You pocket the difference between the new loan amount and your old balance as cash and make a single monthly payment going forward. The interest rate is typically lower than a home equity loan because the new loan holds first-lien position. The downside is closing costs, which generally run 2% to 6% of the new loan amount, and you reset your amortization clock. For conforming loans, Freddie Mac caps the loan-to-value ratio at 80% for a single-unit primary residence on a cash-out refinance, meaning you must retain at least 20% equity after the transaction.4Freddie Mac. Maximum LTV/TLTV/HTLTV Ratio Requirements for Conforming and Super Conforming Mortgages
All three options use your home as collateral. If you default, the lender can foreclose. Borrowing against equity for investments that increase the home’s value or generate a return elsewhere is one thing; using it for consumption spending puts your housing security on the line.
Why 20% Equity Is a Milestone
If you put less than 20% down on a conventional loan, your lender almost certainly required private mortgage insurance. PMI protects the lender, not you, and it adds a noticeable premium to your monthly payment. Federal law ties PMI removal directly to your equity position.
Under the Homeowners Protection Act, you can request cancellation of PMI once your loan balance is scheduled to reach 80% of the home’s original value based on your amortization schedule, or once actual payments bring the balance to that level. You need a clean payment history, current status on the loan, and evidence that the property value has not declined below the original value.5Office of the Law Revision Counsel. 12 USC 4901 – Definitions If you never make the request, the servicer must automatically terminate PMI when the balance is scheduled to reach 78% of the original value, as long as you are current on payments.6Consumer Financial Protection Bureau. Homeowners Protection Act (PMI Cancellation Act) Examination Procedures
One detail that trips people up: “original value” means the lesser of your purchase price or the appraised value at the time of the loan, not the home’s current market value. If your home has appreciated significantly, you may cross the 80% threshold faster through actual payments, but the automatic 78% termination follows the original amortization schedule regardless of appreciation. Extra principal payments can get you there sooner.
When Equity Goes Negative
Negative equity, sometimes called being “underwater,” happens when your mortgage balance exceeds the home’s current market value. This is not just a theoretical concern. It happened to millions of homeowners during the 2008 housing crisis, and localized market downturns can push individual homes underwater even in a broadly healthy economy.
Being underwater does not directly hurt your credit score or trigger any immediate legal consequence. The problems surface when you try to do something with the property. You cannot refinance a conventional loan if there is no equity to support it. If you need to sell, the sale price will not cover what you owe, forcing you to either bring cash to closing or negotiate a short sale with the lender. In a short sale, the lender agrees to accept less than the full balance, but the process damages your credit and the lender may pursue a deficiency judgment for the remaining balance depending on your state’s laws.
Foreclosure is the worst outcome. If you cannot make payments and cannot sell, the lender takes the property. A foreclosure stays on your credit report for up to seven years, a related bankruptcy can remain for up to ten, and qualifying for a new mortgage becomes difficult for years afterward. Walking away voluntarily, sometimes called a strategic default, carries the same credit consequences, and the lender may still hold you responsible for the unpaid balance.
If you find yourself underwater but can still make your payments, the most practical path is usually to stay put and let regular payments continue reducing the balance while the market recovers. Time solves most negative equity problems if you can afford to let it work.
What You Actually Keep When You Sell
The equity number you calculate from your appraised value and loan balance is not what you walk away with at closing. Selling a home carries real costs that eat into your proceeds.
The largest expense is typically the real estate agent commission. As of 2026, combined commissions for the listing and buyer’s agents average roughly 5.4% to 5.7% of the sale price. On a $450,000 home, that is $24,300 to $25,650. Beyond commissions, sellers pay for title insurance, transfer taxes, recording fees, document preparation, prorated property taxes, and any agreed-upon repair credits or buyer concessions. Total closing costs for a seller generally land in the range of 6% to 10% of the sale price.
To estimate your net equity, subtract both the outstanding loan balance and the projected selling costs from the expected sale price. Using the earlier example of a $450,000 home with $275,000 in liens: if selling costs run 8%, that is $36,000. Your net equity would be $450,000 minus $275,000 minus $36,000, leaving $139,000. That is the realistic figure to plan around if you are selling to fund a move, a down payment on the next home, or a major life change. Running a seller’s net sheet before listing keeps expectations grounded.