Overview
Home equity equals a home's current market value minus what is still owed on any mortgages or loans against it. For example, a home worth $500,000 with a $300,000 mortgage balance carries $200,000 in equity. Home improvements, mortgage paydown, and rising property values can all increase equity over time, and homeowners can tap that value through options like a home equity loan, a cash-out refinance, or, for those 62 and older, a reverse mortgage.
Understanding Home Equity
Home equity is the value of your home minus any outstanding debts secured against the property. If your home is worth $500,000 and you have a remaining mortgage balance of $300,000, your home equity is $200,000.
Calculating Your Home Equity
- Determine your home's current market value: get a professional appraisal or research recent comparable sales in your area.
- Calculate your outstanding mortgage balance: total what you owe on any mortgages or loans secured against the property.
- Subtract the balance from the current value: the result is your home equity.
Example: if your home is worth $500,000 and your outstanding mortgage balance is $300,000, your home equity is $200,000.
Factors That Affect Home Equity
- Home renovations and improvements: can increase your home's value and, in turn, your equity.
- Local real estate market trends: rising property values in your area typically increase your equity, and falling values can reduce it.
- Loan payments: as you pay down your mortgage or home equity loan, your equity increases.
- Economic factors: interest rate changes and broader economic conditions can affect your home's value and, by extension, your equity.
Strategies to Increase Home Equity
- Home improvements: renovations that genuinely add value can increase your equity over time.
- Paying down your mortgage: extra payments toward principal build equity faster than the standard amortization schedule.
- Refinancing: a lower interest rate can free up cash flow you can redirect toward paying down principal faster or funding improvements.
- Renting out unused space: extra income from a spare room or unit can be redirected toward your mortgage or home improvements.
Ways to Use Your Home Equity
- Home equity loan or line of credit (HELOC): lets you borrow against your equity for renovations, debt consolidation, or major purchases.
- Cash-out refinance: replaces your existing mortgage with a larger one, letting you access the difference in cash, often used to pay off higher-interest debt at a lower rate.
- Reverse mortgage: available to homeowners 62 and older, letting them borrow against their equity without monthly payments, repaid when the home is sold or the owner passes away.
- Home equity investment (shared appreciation) products: an alternative for homeowners under 62 who want to access equity without a traditional loan. A company provides cash upfront in exchange for a share of the home's future value; terms and eligibility vary significantly by provider, so review them closely.
Borrowing against home equity carries real risk, since your home serves as collateral. Fully understand the terms before committing to any of these options, and consult a financial advisor for guidance specific to your situation.
