Over the past several years, home prices have risen sharply. For many homeowners, that means you may have built more home equity than you realize. Used wisely, this equity can help you fund renovations, invest in education, start a business, or simplify your financial life. Used carelessly, it can increase your debt, shrink your safety net, and even put your home at risk. We will walk through what home equity is, how to calculate home equity, and smart ways to use that equity to build long-term wealth.
What is Home Equity?
Home equity is the portion of your home’s value that you own. To estimate it, start with what your home could sell for today, then subtract your outstanding mortgage balance and any other liens tied to the property, such as a home equity loan or HELOC balance. As you pay down those balances and home values rise, your equity can grow into a major part of your net worth.
When you borrow against your home, lenders focus on your Loan-to-Value (LTV) ratio, and often your combined LTV (CLTV), which includes your mortgage plus any home equity loan or HELOC. In many cases, lenders limit borrowing to around 80% of your home’s value, meaning you typically cannot borrow “all” of your equity. The lower your LTV or CLTV, the stronger you look as a borrower and the more options you may have. A home equity calculator can help you estimate your equity and your LTV before you talk to a lender.
How to Calculate Home Equity
Here is a simple step-by-step approach for owners of homes with equity:
1. Find your current home value.
Look up what your home is worth today. You can use a recent appraisal, ask a real estate agent for an estimate, or use online tools that show home values. A home equity calculator can also help you plug in this number and do the math for you.
2. List every loan tied to your home.
Write down the balance of your main mortgage. Then add any home equity loans, any HELOC balances, and any other liens that use your home as collateral. You can find these amounts on your monthly statements or in your online accounts.
3. Add up your total home debt
Add all of those balances together. This total is how much you still owe on your home.
4. Subtract what you owe from what your home is worth
Take your current home value from step 1 and subtract the total debt from step 3. The number you get is your home equity.
Over time, your home equity can grow as you pay down your loans and if your home’s value increases. It can also shrink if home prices in your area drop or if you take out more debt against the property.
Ways to Tap Home Equity
There are a few common ways to turn home equity into money you can actually use, and each one fits a different situation. The best option for you depends on your current mortgage rate, how steady your income is, and how clear your plans are for the funds.
Cash-Out Refinance
With a cash-out refinance, you replace your entire current mortgage with a new, larger mortgage and take the difference as cash. For those who have homes with equity, this can work when today’s rates are similar to or lower than your current rate, and you want one loan and one payment.
Many homeowners still have fixed rates that are well below today’s rates. A cash-out refinance means you give up that entire low-rate first mortgage, not just a small portion of it. That can raise your payment sharply even if you only pull out a modest amount of cash. A home equity loan or HELOC may let you keep your low-rate first mortgage and pay the higher rate only on the new, smaller balance.
Home Equity Loan
A home equity loan is a second mortgage that sits on top of your existing one. You keep your current mortgage, then add a new loan with a fixed interest rate and a set payoff period, such as 10, 15, or 30 years. You get the money in one lump sum and pay it back in equal monthly payments.
This can be a good fit when you have a clear, one-time cost in mind, like a major renovation, a medical expense, or a tuition bill. The tradeoff is that you now have a second monthly payment, and there are usually closing costs. It is important to be sure the project or goal you are funding is worth taking on that extra payment.
Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, works more like a credit card backed by your home. The lender gives you a credit limit, and during the draw period, you can borrow, repay, and borrow again up to that limit. Payments often start out as interest-only, then switch to a repayment phase where you pay down both the balance and the interest.
A HELOC can be helpful when costs are spread out or uncertain, such as a long, step-by-step remodel or ongoing education expenses. Most HELOCs have variable interest rates, so your payment can change over time. It is also easy to overuse a HELOC if you treat it like extra income, so having a clear spending and repayment plan is essential.
Other Equity-Based Wealth Strategies
You can also use home equity without taking on a second loan. Some homeowners choose to sell and move to a smaller or less expensive home, then use the freed-up equity to invest, pay down other debts, or build an emergency fund. Homeowners age 62 and older may also explore reverse mortgages, though these products come with strict rules, fees, and long-term tradeoffs.
Home equity tends to support wealth-building best when you use it for moves that strengthen your long-term finances, like value-adding home improvements, education, a well-planned business, or paying off high-interest debt. In the U.S., interest paid on home equity debt may be tax-deductible only when you use the funds to buy, build, or substantially improve the home that secures the loan. For many homeowners, running the numbers first helps you turn equity into a tool instead of a burden.
Thinking about selling, buying, or both? A REMAX agent can help you compare options, price your home, and plan your next move. Reach out to your local REMAX office and map out a plan that fits your timeline and budget.
