What Is Home Equity?

Home equity is the current market value of your home minus the total of every loan secured by it, including your first mortgage, any home equity loan, and any balance on a home equity line of credit (HELOC). If your home is worth $450,000 and you owe $280,000 on your mortgage and $20,000 on a HELOC, your equity is $150,000. It grows as you pay down principal and as the home's value rises, and it shrinks when the value falls or you borrow more against the home.

How do you calculate your equity and loan-to-value ratio?

1. Estimate the market value. Recent sale prices of similar nearby homes give a rough figure. A lender may order an appraisal, a formal estimate of value, or use another method to check your home's value before lending against your equity.
2. Add up every loan balance on the home. Use the current balance on each monthly statement.
3. Subtract the loans from the value. The result is your equity in dollars.

Lenders describe the same numbers as ratios:

• Loan-to-value ratio (LTV): your first mortgage balance divided by the home's value.
• Combined loan-to-value ratio (CLTV): all loan balances on the home divided by its value.

Example: Value $450,000, first mortgage $280,000, HELOC balance $20,000.

• Equity: $450,000 - $280,000 - $20,000 = $150,000.
• LTV: $280,000 / $450,000 = 62.2%.
• CLTV: $300,000 / $450,000 = 66.7%.
• Equity as a share of value: 100% - 66.7% = 33.3%.

How does equity grow?

• Your down payment. This is your starting equity. A $75,000 down payment on a $375,000 home starts you at 20%.
• Paying down principal. Each payment repays some of the loan balance. On a $300,000, 30-year fixed loan at 7.32%, the payment is $2,060.79. In the first month, $1,830.00 goes to interest and $230.79 to principal. The balance drops by $2,864 in the first year, $16,661 in 5 years, and $40,658 in 10 years.
• Rising home values. The Federal Housing Finance Agency (FHFA) House Price Index rose 2.6% from July 2025 to July 2026. The 12-month change ranged from 0.6% in the Mountain census division to 6.0% in the Middle Atlantic division. A 2.6% rise on a $450,000 home adds $11,700 of equity.

Extra principal payments build equity faster. The Consumer Financial Protection Bureau (CFPB) notes that you can prepay on your own without signing up for a program or paying a fee, though some loans carry a prepayment penalty. Whether to pay your mortgage early weighs that choice against other uses of the money.

How can equity shrink?

• Falling home values. Values can drop locally even when the national index rises. In July 2026, prices in the Mountain division fell 0.8% from the month before.
• Borrowing against the home. A cash-out refinance, home equity loan, or HELOC draw raises what you owe, which lowers your equity by the amount borrowed plus any costs added to the loan.
• A reverse mortgage. Interest and fees are added to the balance each month, so the balance grows and your equity falls over time.

When the loans exceed the home's value, you have negative equity, often called being underwater. If you sell while underwater, the sale price does not cover what you owe, but your lender may approve a short sale for less than the balance due. Whether you owe the remaining balance depends on state law and any lender waiver; get any waiver in writing.

What does more equity let you do?

Dropping mortgage insurance

Under the federal Homeowners Protection Act, PMI rules use the home's original value, which is usually the lower of the purchase price and the appraised value when you bought. On a $375,000 home, you can request cancellation once the balance reaches $300,000 (80%), and PMI ends automatically at $292,500 (78%). To request it, you generally need a good payment history, no second liens, and possibly an appraisal showing the value has not fallen. Loans owned by Fannie Mae or Freddie Mac may allow earlier cancellation under those companies' own guidelines, so ask your servicer which rules apply to your loan. Ways to avoid or remove PMI covers more options.

FHA loans work differently. Under current HUD rules, annual mortgage insurance on an FHA loan lasts 11 years if your starting LTV was 90% or less, and for the full loan term if it was higher. Building equity does not end it sooner; the only other way to stop paying it is to pay off the FHA loan, for example by refinancing into a different loan.

Borrowing against equity

The CFPB says lenders typically require you to keep at least 10% to 20% of your home's value as equity when you take out a cash-out refinance, home equity loan, or HELOC. For a HELOC, the CFPB says the limit is generally a percentage of the appraised value minus the amount you owe. Keeping 10% to 20% equity means total loans of 80% to 90% of the value. Using the $450,000 example with $300,000 owed:

• At an 80% limit: ($450,000 x 0.80) - $300,000 = $60,000 available.
• At a 90% limit: ($450,000 x 0.90) - $300,000 = $105,000 available.

The lender also checks your income, debts, and credit history, and can approve less than the equity math allows. How a HELOC works explains draw and repayment periods, a HELOC compared with a home equity loan helps you choose between them, and how refinancing works covers cash-out and rate-and-term refinances.

What are the risks of borrowing against your equity?

• Your home is the collateral. If you fall behind on a home equity loan, HELOC, or cash-out refinance, you can lose the home to foreclosure.
• Upfront costs. Appraisal fees, application fees, and closing costs reduce the equity you can use.
• Repayment when you sell. Loan payoffs at the sale reduce your proceeds.
• A frozen or reduced line. HELOC plans generally let the lender freeze or reduce your line if the home's value declines significantly or your finances change for the worse.
• Changing payments. HELOC rates are typically variable, so the payment can rise even if you borrow nothing more. When the draw period ends, you start repaying principal, often over 10 or 15 years, or some plans require the full balance at once as a balloon payment.

For how the mortgage itself builds equity over its term, see what a mortgage is and how it works.