Home Equity: What It Is and How You Can Use It

Home equity is the portion of your home’s value that you own outright, calculated by subtracting your mortgage balance from your home’s market value. As you pay down your mortgage and property values rise, your equity grows.

You can tap into this equity for home improvements, debt consolidation, or other major expenses. Understanding how home equity works can help you maximize it for your financial goals.

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How does home equity work?
How to use home equity
Financial products that use home equity
More about home equity

How does home equity work?

Home equity is the difference between your home’s value and any loans against it, such as a mortgage. The most accurate way to determine your home’s value is through a professional appraisal. If you don’t have one, you can estimate using:

A broker price opinion
An online real estate estimator
Your property’s tax-assessed value

Once you have an estimated home value, subtract your loan balances to calculate your home equity:

Home equity ($) = Estimated home value – Loan balances

Home equity (%) = (Home equity ($) / Estimated home value) x 100

The following examples show estimated home equity under three scenarios:

	Home value	Loan balances	Equity ($) & (%)
Scenario 1	$350K	$315K	$35,000 (10%)
Scenario 2	$350K	$280K	$70,000 (20%)
Scenario 3	$350K	$367.5K	-$17,500 (–5%)

Tip

Negative equity happens when you owe more than your home’s value, as shown in Scenario 3. Building equity over time reduces the risk of negative equity, even if property values decline.

How to use home equity

Two of the most common ways to tap into your equity are a home equity loan and a home equity line of credit (HELOC). Both allow you to borrow against the value of your house in exchange for cash. You can use the equity you’ve built up for almost any purpose. We’ve listed the most common ways below.

Home improvements

Home remodels and upgrades can be expensive, especially if you need to make significant changes to your house, such as removing walls or installing a new kitchen. You can borrow some of your home equity to get the cash you need to fund an extensive home remodel or even to take care of one-off projects.

Ways you could use your home equity to improve features of your home include:

Adding a new home office
Installing a pool
Repairing your roof
Upgrading your appliances
Refreshing your landscaping
Making energy efficiency improvements
Building a guest house

Tip

These are not all capital improvements that would increase the home’s value or qualify for an interest deduction according to IRS guidelines.

Debt consolidation

If you have high-interest credit card debt, debt consolidation can reduce your overall interest and simplify the payment process, especially if you owe money to multiple creditors.

As we noted, by using your home equity to consolidate your debt, you’ll pay a lower interest rate than with unsecured loans. When you use your home equity to get a loan, the lender has rights to your home if you don’t pay as agreed. The lender’s risk is less, resulting in a lower rate.

While you may benefit from a lower rate by using your equity to consolidate debt, remember that you’re risking your home. If you don’t repay the equity you borrowed as you agreed, your lender could foreclose on your home to get paid. So, keep this in mind before you proceed.

Also, when deciding whether to use your home equity to consolidate debt, consider how long you need to repay the debt. Even though the rate is lower on a loan secured by your home, you may pay more interest over time if you have a longer repayment term (e.g., 15 years versus three years).

Pay for college

Although you can get student loans to pay for higher education, a home equity loan could also be an affordable way to borrow for school, thanks to (usually) lower interest rates. Be aware, however, that a home equity loan doesn’t offer the same borrower protections as federal student loans, such as the ability to defer payments while in school.

In addition, interest on student loans is tax-deductible even if you don’t itemize, whereas home equity loan interest is deductible only if you itemize and use the equity to improve or build a home.

Pay for ongoing medical treatments

If you have medical expenses you can’t pay, borrowing against your home equity could be a wise option. You could use your home equity to pay one large medical bill or cover ongoing treatment costs.

Not only will you likely receive a lower interest rate by using your home equity than you will with other options (e.g., a credit card), but you might be able to borrow more money. Even so, make sure you can repay the amount and choose the shortest possible repayment term.

Every time you take out some of your home’s equity as a loan, you’re placing additional risk on one of your most valuable assets (your home) since you’re offering your home as collateral to your lender. If you don’t pay as agreed, your lender can pursue foreclosure as a remedy.

Plus, repay the equity you borrow from your home as fast as possible. The longer it takes to repay the debt, the more interest you’ll pay.

Which financial products use your home equity?

Many financial products allow you to use your home equity. Several of the most common examples include a home equity loan, a HELOC, a home equity investment, a cash-out refinance, and a reverse mortgage.

Home equity loan

What is a home equity loan?

A home equity loan allows you to borrow some of the equity you’ve built in your home in one lump sum.

You’ll often repay a home equity loan similar to a mortgage in equal installments over 10 to 30 years with a fixed interest rate for the duration of the loan’s term. Since this is a second home loan behind your mortgage, you’ll need to make two monthly payments on your home.

The amount you can borrow will depend on how much equity you have in your home. You may need to keep 10% to 15% equity in your home. As such, you must ensure you have enough equity before considering this option.

Who it’s best for

A home equity loan may be best if you have a sizeable one-time need. For example, it can be an excellent way to fund a large home improvement project (e.g., building an addition) or consolidate debt.

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Find out more about the highest-rated home equity loan companies.

Home equity line of credit

What is a HELOC?

A home equity line of credit (HELOC) is similar to a credit card in that you can use and repay as many times as you want.

HELOCs often come with two borrowing periods: an initial draw period with a variable rate where you can use the line of credit and pay back the funds as much as you want (often up to 10 years) and a repayment period, where you repay the balance on your HELOC via fixed monthly payments.

Remember that you’re only required to make interest-only payments during the HELOC’s initial period. If you don’t pay back the principal quickly, you could incur significant interest costs. So only use the HELOC if you have a plan to repay the funds.

Who it’s best for

Because of the ability to redraw from your credit line, a HELOC is often best used to pay for costs you think you can quickly repay.

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Home equity investment (aka home equity sharing agreement)

What is a home equity investment?

A home equity investment, also called a home equity sharing agreement, allows you to access the equity in your home without taking on traditional debt, such as a loan. Instead of borrowing money and repaying it with interest, you partner with an investor who provides you with a lump sum in exchange for a percentage share of your home’s future value.

How it works

The investor offers you cash based on your home’s current market value and your available equity. In return, when you sell your home or the agreement ends (typically 10 to 30 years), you repay the investor the original amount plus a percentage of any increase—or decrease—in your home’s value. This structure means you don’t have monthly payments or interest charges, making it different from a traditional loan.

Who it’s best for

Home equity sharing agreements are best for homeowners who need cash but want to avoid additional debt or monthly payments, including:

Homeowners who want to avoid debt: If you prefer not to add another loan payment to your monthly budget, a home equity investment provides a way to access cash without taking on more debt or interest.
Individuals with poor credit: Traditional loans may be hard to obtain if your credit score is low. Home equity sharing agreements often have more flexible credit requirements, making them accessible for those with less-than-perfect credit.
Long-term homeowners: If you plan to stay in your home for several years, a home equity investment can provide funds for major expenses, such as home renovations or business ventures, without the immediate pressure of repayment.

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See our resource on the best home equity investments.

Cash-out refinance

What is a cash-out refinance?

A cash-out refinance is the same as a traditional mortgage refinance, except the purpose of the refinance is to allow you to take some of your equity out of your home in cash.

If you don’t want to hassle with making two monthly payments, a cash-out refinance can be an excellent alternative to a home equity loan because you can refinance your current mortgage into a new one.

Similar to a home equity loan, you can use a cash-out refinance to fund home improvements, consolidate debt, or cover almost any other significant one-time funding need.

Who it’s best for

It’s best for those with sizeable one-time funding needs because you get the money you take out of your home in one lump sum.

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Reverse mortgage

What is a reverse mortgage?

A reverse mortgage is a loan people at least 62 years old can use to access their home equity. This differs from the other options because your lender will generally cash out your equity via monthly payments, so it’s a way to use your equity to create an income stream to fund your retirement.

Even after all the equity in your home is paid out, you can keep living in your home. You won’t owe payments on the amount you received from the reverse mortgage. When you pass away, the lender gets the rights to your home.

Who it’s best for

A reverse mortgage can be a valuable tool for certain homeowners, especially those who want to access their home equity without having to sell or make monthly payments. Here’s who benefits most from this option:

Seniors aged 62 and older: Reverse mortgages are designed for older homeowners. If you meet the age requirement and need to supplement your retirement income, a reverse mortgage allows you to convert your home’s equity into cash without selling your property.
Homeowners planning to stay long-term: If you plan to remain in your home for an extended period, a reverse mortgage could be ideal. The loan doesn’t need to be repaid until you move, sell the home, or pass away, making it suitable for those who wish to age in place.
Individuals with significant home equity: To qualify for a reverse mortgage, you need substantial equity in your home—often at least 50%. Homeowners who have paid off their mortgage or have low balances can tap into this equity to cover expenses or enhance their lifestyle.
Retirees needing to reduce monthly expenses: For those who struggle with or want to reduce monthly payments, a reverse mortgage provides a way to eliminate mortgage payments and access funds without taking on new debt obligations.
Those seeking a financial safety net: If you need a line of credit to cover unexpected expenses or medical bills, a reverse mortgage can offer flexible payout options (lump sum, monthly payments, or line of credit) tailored to your financial needs.

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Why is building home equity important?

Building home equity gives you the flexibility to use it for many purposes. Below are several examples of why building home equity is advantageous:

You can build long-term wealth. For many Americans, their home is their single largest asset. Building equity in your home is a way to increase your net worth. Your home is a unique asset because it provides shelter while creating wealth and financial security.
Your financial flexibility increases as you reduce your debt. One way to increase your home equity is to reduce the debt you owe on your home. As you pay off your home loans, you can use the money you would have spent on loan payments as you wish (e.g., start your dream business or retire).
You can borrow your equity using a loan. Homeowners can access the equity they’ve built in their homes by taking out home equity loans or home equity lines of credit (HELOCs). The funds can consolidate higher-rate debt, fund renovations, pay college tuition, and more.
You can sell your home for more than you owe. If you have equity in your home and want or need to sell your home, you have the flexibility to do so and use the funds as you want—to buy another home or pocket the cash, for instance. You may be unable to do this if you haven’t built up equity.

Building home equity allows homeowners to increase their net worth, benefit from increased financial flexibility, sell their home, or even use their home’s equity as an additional funding source.

Keep in mind if you want to use the equity in your home as a funding source, the amount you can borrow depends on how much equity you have in your home. You can find out more about the pros and cons of HELOCs here.

How to build home equity

Building home equity over time is simple. Here’s how to do it.

Buy your home

To build home equity, you must buy your home and quit renting. When you own your home, changes in real estate prices can help your equity increase over time. Under normal market conditions, home values appreciate every year. As the value of your home increases, so does your home equity.

Let’s say you buy a home for $250,000, and its value appreciates by 3.5% per year, on average. As shown below, at the end of 10 years, you would have built $90,724 in equity just from the value appreciation.

If the average annual increase were 2%, you would still have $48,773 equity in your home.

Besides benefiting from potential value appreciation, any down payment you make when purchasing your home gives you equity. Plus, you can build “sweat equity” in your home by making improvements using your labor instead of paying a contractor (if you have the skills to do so).

Make your mortgage payments

Building equity in your home happens naturally when you make mortgage payments. As long as your loan isn’t interest-only, each payment reduces your principal balance, increasing your equity.

For example, if you buy a home for $250,000 with a 30-year mortgage at a fixed rate of 7%, and put down 10% ($25,000), here’s how your equity builds over time:

	Mortgage balance*	Equity gained
Years 1 – 5	$211,796.08	$13,203.92
Years 6 – 10	$193,077.86	$31,922.14
Years 11 – 15	$166,542.45	$58,457.55
Years 16 – 20	$128,925.18	$96,074.82
Years 21 – 25	$75,597.98	$149,402.02
Years 26 – 30	$0.00	$225,000.00

*Shows balance at the end of each period.

By the end of year 15, you would have built over $58,000 in equity, not including appreciation or your initial down payment.

Speed up equity growth

You can build equity faster by making extra payments or choosing a shorter loan term. For instance, with a 15-year mortgage on the same loan, you’d pay it off entirely in 15 years:

	Mortgage balance*	Equity gained
Years 1 – 5	$174,178.80	$50,821.20
Years 6 – 10	$102,133.39	$122,866.61
Years 11 – 15	$0.00	$225,000.00

*Shows balance at the end of each period

In this scenario, you’d build over $50,000 in equity within the first five years. Even with a 30-year loan, making extra payments can significantly accelerate equity growth.

Tip

Before making extra payments, check with your lender for any prepayment penalties.

How to borrow against your home equity

If you’re considering tapping into your home’s equity—whether through a HELOC, home equity loan, home equity sharing agreement, cash-out refinance, or reverse mortgage—here are the general steps to follow:

Assess your home equity. Ensure you have enough equity available in your home. Most lenders and investors prefer your loan-to-value ratio (LTV)—the total amount borrowed compared to your home’s value—to stay below a certain threshold (often 80% to 85%).
Review your financial situation. Check whether you meet the eligibility requirements for your chosen option. This may include verifying your credit score, income stability, and financial history. If you’re pursuing a reverse mortgage or home equity sharing agreement, the criteria may be more flexible.
Shop for lenders or programs. Compare options from different lenders, including banks, credit unions, online lenders, or specialized programs for home equity sharing or reverse mortgages. Evaluate their rates, terms, and eligibility requirements to find the best fit for your needs.
Get your home appraised. Once you’ve chosen a lender or program and are preapproved, an appraisal may be required to determine your home’s current market value. Depending on the provider, you may be responsible for the appraisal cost, or it might be covered.
Complete the agreement and receive funds. If your appraisal and application are approved, you’ll review and sign the final documents. Depending on the type of equity financing, you may receive a lump sum, line of credit, or regular payments based on your arrangement.

How to apply for a HELOC; Home equity loan calculator

Can you lose home equity?

Yes, you can lose home equity in several ways, including:

Decline in property value: If your home or neighborhood falls into disrepair or becomes less desirable, property values can decline, reducing your equity.
Macroeconomic conditions: National economic factors, such as recessions or housing market downturns, can cause home values to drop. For example, during the 2008 housing crisis, many homeowners in areas including California and South Florida experienced declines in home equity, sometimes resulting in negative equity.
Reverse mortgages: With a reverse mortgage, you gradually lose home equity as the lender’s share of your home increases when you receive funds.
Home equity sharing agreements: In these agreements, you get a lump sum or periodic payments in exchange for sharing a percentage of your home’s future value. While this doesn’t immediately decrease your equity, when you sell or settle the agreement, you’ll owe a share of any home value appreciation, which can reduce your overall equity if the value hasn’t appreciated as expected.
Borrowing against your home: Any time you take out a loan secured by your home’s equity, such as a HELOC, home equity loan, or cash-out refinance, you decrease your equity by the amount borrowed. If home values decline, you could owe more than your home is worth, resulting in negative equity.

Maintaining and increasing your home’s value through upkeep and renovations, as well as being cautious about leveraging your home equity, can help protect against these risks and preserve your equity over time.

How to sell equity in your home

What do homeowners most often use their home equity for?

Common ways homeowners use their home equity include:

Pay for home improvements or repairs
Fund educational costs for themselves or their children
Cover significant one-time expenses (vacations, weddings, or medical bills)
Start a new business venture
Consolidate higher-interest-rate debt
Convert their equity into a regular income stream (e.g., via a reverse mortgage)
Give funds to an adult child for a down payment on a home

FAQ

How long does it take to build home equity?

The time it takes to build home equity depends on factors such as the size of your down payment, the level of market appreciation, the home improvements you make, and the term of your mortgage. The shorter the term, the faster you’ll build equity (e.g., 100% equity in 15 years with a 15-year mortgage).

How much of your home equity can you borrow?

The amount of home equity you can borrow varies by lender, but many lenders want you to keep at least 15% equity in your home. Other lenders may allow you to keep as little as 5% equity in your home. The better your credit, the more home equity your lender may let you borrow.