What is home equity?

Home equity is the difference between what your home is currently worth and what you still owe on any mortgages or liens secured by it. If your home is worth $400,000 and your remaining mortgage balance is $260,000, you have $140,000 in equity — roughly 35% of the home's value. Equity is a real financial asset; it can be tapped through a HELOC or cash-out refinance, or it converts to cash when you sell.

How equity builds over time

Every mortgage payment you make has two components: principal (which reduces the balance you owe and directly increases equity) and interest (which goes to the lender). Early in a loan, interest consumes most of each payment. As the balance falls, a larger share goes to principal — meaning equity grows faster over time. The CFPB's owning-a-home resources illustrate this amortization curve.

• Equity = current market value − outstanding loan balance(s).
• Making extra principal payments accelerates equity growth.
• Rising home values increase equity without any action on your part.
• Falling home values — or a cash-out refinance — reduce equity.
• Most lenders require you to retain at least 20% equity after borrowing against it.

Ways to use home equity

Home equity can be accessed in three main ways: (1) a home equity loan — a lump-sum loan at a fixed rate, secured by your home; (2) a HELOC (home equity line of credit) — a revolving credit line you draw from as needed; or (3) a cash-out refinance — you replace your current mortgage with a larger one and take the difference in cash. All three use your home as collateral, meaning default can result in foreclosure.

What affects your home's value — and therefore your equity

Market conditions, local demand, neighborhood comparables ("comps"), and property condition all affect the appraised value lenders use. Market value can move independently of what you paid. A formal appraisal — typically required before a lender approves an equity product — establishes the current value used in underwriting. The CFPB explains home equity borrowing options and protections.