Home equity

What It Means

Home equity is the share of your home that's yours free of debt. The Consumer Financial Protection Bureau (CFPB) defines it as the home's value minus what you owe on the mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more; if a second loan such as a home equity loanHome equity loanA loan secured by your home's equity that pays out one amount at the start and is usually repaid at a fixed rate; often called a second mortgage. See more or HELOCHELOCA home equity line of credit: a revolving line secured by your home that you can draw on, repay and draw on again during a set draw period. See more is secured by the house, subtract that balance too. Equity grows as you pay down principal and when the home's value rises, and it shrinks when the value falls or you borrow against it.

How People Say It

• "We've built up a lot of equity since we bought."
• "Prices dropped, so our equity took a hit."
• "They want to tap their equity to redo the kitchen."

The Breakdown

Worked example. A couple bought a $400,000 home with $40,000 down, so on day one their equity was $40,000, or 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more%. A few years later:

What the result means. Their equity more than doubled from two sources: principal paid down and a rise in value. A fall in value or new borrowing against the house takes equity away, and if the balances ever pass the value, the equity turns negative.

Two numbers that look alike. Private mortgage insurancePrivate mortgage insuranceInsurance that protects a mortgage lender if the borrower stops paying, often required on a conventional loan with less than 20% down. See more rules under the Homeowners Protection Act measure your balance against the home's original value, not today's estimate, so rising prices alone don't end PMI under those rules.

Good to Know

Your equity figure is only as accurate as the value estimate behind it. Home equity loans, HELOCs and cash-out refinances all turn equity into borrowed money secured by the house. The Federal Trade Commission and the CFPB both describe these as loans backed by your home, so missed payments put the home itself at risk. Read the FTC's guide on home equity loans and lines of credit before you apply for one.

Related Terms and Categories

• HELOC

  A home equity line of credit: a revolving line secured by your home that you can draw on, repay and draw on again during a set draw period.

• Home equity loan

  A loan secured by your home's equity that pays out one amount at the start and is usually repaid at a fixed rate; often called a second mortgage.

• Cash-out refinance

  Replacing your mortgage with a new, larger one and taking the difference, minus closing costs, in cash.

• Negative equity

  Owing more on a loan than the thing it paid for is worth, most often a car loan balance that's higher than the car's value.

• Private mortgage insurance

  Insurance that protects a mortgage lender if the borrower stops paying, often required on a conventional loan with less than 20% down.

• Amortization

  Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.

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