Home Equity: What It Is and How It Affects Homeowners

What is home equity and how is it calculated?

Home equity equals your property’s current market value minus outstanding mortgage balances and any other liens. For example, if a house is worth $350,000 and the mortgage balance is $200,000, equity is $150,000. Equity grows when you pay down principal or when the local housing market raises property values. Renovations that increase market value and periodic appraisals also affect reported equity.

Equity is not a fixed number—market fluctuations, new loans secured against the house, and changes in neighborhood demand will change it. Lenders typically require an appraisal or automated valuation to estimate current equity when you apply for products like a loan or refinance.

How can a homeowner use home equity?

Homeowners commonly access equity via a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. A home equity loan provides a lump-sum payment repaid over a fixed term, while a HELOC offers a revolving credit line with variable draws. A cash-out refinance replaces the existing mortgage with a larger loan and converts equity into cash while changing mortgage terms.

Common uses include home improvements that may raise property value, debt consolidation, funding education, or covering major expenses. Each option has different implications for interest costs, repayment structure, and the lien position on the property, so weigh short- and long-term effects before borrowing.

Differences between a home equity loan and a mortgage refinance

A home equity loan is typically a second lien on your house, meaning it sits behind the primary mortgage. It often has a fixed interest rate and fixed payments, making budgeting predictable. By contrast, a cash-out mortgage refinance replaces the first mortgage, consolidating balances into a single loan and potentially changing the mortgage rate and term.

Refinance can lower monthly mortgage payments if rates are favorable or extend the term, but it may incur closing costs and reset amortization. Home equity loans or HELOCs may have lower upfront costs but carry separate monthly obligations. Choosing between them depends on your mortgage rate, remaining term, credit profile, and the amount of equity available.

What risks and costs should you consider about home equity?

Borrowing against equity increases the amount secured by your house; failure to meet payments can lead to foreclosure. Loans secured by property often include closing costs, appraisal fees, origination charges, and possible annual fees for HELOCs. Interest may be variable for HELOCs, exposing borrowers to rate risk. Using equity for non-appreciating expenses can increase the chance of owing more than the property’s market value if house prices fall.

Tax treatment for interest on equity loans can vary by jurisdiction and circumstance; consult a tax professional for specific guidance. Before drawing on equity, assess your budget, emergency savings, and whether projected benefits outweigh the risks of added secured debt.

How to find local services and compare home equity options?

Start by checking offers from a mix of sources: your current mortgage lender, national banks, credit unions, and local mortgage brokers or lenders in your area. Compare annual percentage rates (APR), loan terms, fees, prepayment penalties, and whether the product is a first or second lien. Request a Loan Estimate or equivalent document for transparent cost comparisons.

Look for lenders that provide clear explanations of appraisal requirements, draw periods for HELOCs, and how payment amounts can change. Read customer reviews and verify license status where applicable. Consider getting multiple preapprovals to understand how different providers view your credit and property before committing.

Conclusion

Home equity is a valuable financial resource tied to the market value of your house and the balance of your mortgage. It can be accessed through various products—including home equity loans, HELOCs, and mortgage refinances—each with distinct structures, costs, and risks. Carefully evaluate how borrowing against your property fits your financial goals, compare local services and loan terms, and seek professional advice when tax or complex financial questions arise.