Home equity is the part of your home you actually own. The formula is one line: home value minus mortgage balance. If your home is worth $400,000 and you still owe $240,000, you have $160,000 in equity, or 40% of the home's value. Everything else in this guide is just applying that formula to real situations: appreciation, paying the loan down, second liens, and the 80% rule lenders use when you borrow against it.
The formula, with a worked example
Equity = current market value - total mortgage balances owed
Note the word "total": if you have a first mortgage plus a home equity loan or HELOC balance, subtract both. A second lien counts against your equity just like the first mortgage does.
Example: you bought for $320,000 with 20% down, so your loan started at $256,000. Seven years later at 6.5%, your balance is about $231,466, and similar homes now sell for $410,000. Your equity is $410,000 - $231,466 = $178,534. Roughly $90,000 of that came from the home gaining value, and the rest came from seven years of principal payments slowly shrinking the loan.
Two numbers matter alongside the dollar figure:
- Equity percentage: equity divided by home value. Here $178,534 / $410,000 = 43.6%.
- Loan-to-value (LTV): balance divided by home value. Here $231,466 / $410,000 = 56.4%. Lenders watch LTV closely: below 80% usually means no private mortgage insurance on a new loan, which is one more reason equity matters. See what PMI is and how to avoid it.
Quick table: equity at a glance
| Home value | Mortgage balance | Your equity | Equity % | LTV |
|---|---|---|---|---|
| $250,000 | $200,000 | $50,000 | 20.0% | 80.0% |
| $350,000 | $210,000 | $140,000 | 40.0% | 60.0% |
| $450,000 | $300,000 | $150,000 | 33.3% | 66.7% |
| $400,000 | $240,000 | $160,000 | 40.0% | 60.0% |
The $250,000 row is the warning case: 20% equity sounds fine, but at 80% LTV you have almost no cushion. A 10% price drop would cut that equity nearly in half.
What value should you use?
Use a realistic market value, not the number you wish were true. The best estimate is recent sale prices of similar nearby homes, which is what an appraiser uses. Automated online estimates are a decent starting point but can miss renovations or a bad roof. Tax assessments are often the least reliable of the three, since they lag the market and follow their own formula.
What you can borrow against it: the 80% rule
Most lenders cap your combined loans at 80% of the home's value. So your usable equity is not your full equity, it is:
Borrowable amount = (80% x home value) - current balance
On the $400,000 home with a $240,000 balance: 80% of $400,000 is $320,000, minus $240,000 leaves $80,000 you could potentially borrow through a home equity loan or HELOC. On the $350,000 home with a $210,000 balance, it is $280,000 - $210,000 = $70,000. The full comparison of those two borrowing routes, with monthly payments, is in home equity loan vs HELOC: how much can you borrow. Run your own numbers in the home equity calculator.
How equity grows over time
Equity grows from two engines at once, and early on the second one does most of the work:
- Appreciation. If your $300,000 home rises to $380,000 over five years while your 6.5% loan balance falls from $300,000 to about $280,833, your equity goes from $0 at a 100% loan (or $60,000 with 20% down) to $99,167. Price growth, not payments, built most of it.
- Amortization. Early mortgage payments are mostly interest, so the balance falls slowly at first, then faster. After 5 years on that $300,000 loan you still owe $280,833; after 10 years, $254,328. The payoff accelerates every year you hold the loan.
A $200-per-month extra principal payment supercharges the second engine: on a $300,000 loan at 6.5%, it pays the loan off in 277 months instead of 360, saving $103,449 in interest and 83 months of payments. That is equity you build with money that would otherwise have gone to the bank as interest. Our mortgage calculator lets you test extra payments on your own loan.
Can equity go negative?
Yes. If you owe $280,000 on a home now worth $250,000, your equity is negative $30,000: you are underwater. It usually happens after buying with a tiny down payment and then a local price drop, or after borrowing heavily against the home. Being underwater does not force a sale, but it blocks refinancing and selling without bringing cash to closing. The fix is the same math in reverse: keep paying the balance down, avoid new liens, and wait for values to recover. If refinancing is on your mind, check should I refinance my mortgage first.
FAQ
How do I calculate my home equity?
Subtract everything you owe on the home from its current market value: equity = home value - mortgage balance(s). A $400,000 home with a $240,000 mortgage gives $160,000 in equity. Include HELOC and second-loan balances in what you owe.
What is a good amount of home equity?
20% equity (80% LTV) is the first milestone: it usually removes PMI on a new loan. 40% or more gives you real borrowing room and a cushion against price drops. There is no maximum; 100% means you own the home free and clear.
How much equity can I borrow from my home?
Most lenders cap total loans at 80% of value, so borrowable equity = (80% x home value) - current balance. On a $400,000 home owing $240,000, that is $80,000. Your credit, income, and debts still have to qualify.
Does a HELOC reduce my home equity?
Yes. Every dollar drawn on a HELOC is an additional lien, so it subtracts from equity exactly like mortgage debt. An undrawn HELOC limit does not reduce equity, but lenders still count the credit line when you apply for other loans.
How often should I calculate my home equity?
Once a year is enough for most owners, plus any time you consider borrowing, refinancing, or selling. Use a realistic value: recent comparable sales, not a tax assessment or an automated estimate alone.
What is the fastest way to build home equity?
Extra principal payments. $200 a month extra on a $300,000 loan at 6.5% saves $103,449 in interest and pays the loan off 83 months early. Renovations only help if they raise market value by more than they cost, which most do not.
Estimates for planning only, not financial advice. Home values and loan terms vary by market and lender.