What is home equity and how is it calculated?

Home equity equals your property’s current market value minus the total outstanding mortgage and any secured liens. For example, if a house is worth $300,000 and you owe $200,000 on the mortgage, equity is $100,000. Market value can be estimated with recent sale prices in your area or a professional appraisal. Keep in mind that local market conditions, improvements, and depreciation all affect that valuation.

How can a loan use home equity?

Lenders use home equity as collateral for products such as home equity loans and home equity lines of credit (HELOCs). A home equity loan typically provides a lump sum repaid over a fixed term, while a HELOC works more like a revolving credit line. Both reduce your equity because they add secured debt against the property. Borrowing against equity increases your total mortgage balance and can affect monthly payments and loan-to-value ratios.

How does a mortgage affect your home equity?

Every mortgage payment that reduces principal increases your equity. Refinancing can change how quickly you build equity: switching to a shorter-term mortgage often increases principal paydown, while extending a term may slow equity growth. Interest rates and payment structure also influence how much of each payment goes to principal versus interest. If property values fall, equity can decline even if you continue making mortgage payments.

What happens to equity when you sell your house?

When you sell your house, equity generally becomes the net proceeds after paying off mortgages, liens, closing costs, and taxes where applicable. For example, selling a home for more than the outstanding debts increases proceeds, while selling in a down market can leave little or no equity. Sellers should account for real-world costs like agent fees, repairs, and transfer taxes that reduce the amount they receive from the sale.

How is property value related to equity and long-term planning?

Property value is one side of the equity equation and depends on location, condition, comparable sales, and broader market trends. Home improvements that add functional value—such as updated kitchens or energy-efficient systems—can increase property value and, in turn, equity when measured against outstanding debt. However, not all renovations return their cost in full; consult local services or professionals for estimates and weigh costs against expected value changes.

Conclusion

Home equity is a practical measure of ownership in your property and a financial resource that can be used for borrowing, refinancing, or future planning. Understanding how market value, mortgage balances, and additional liens interact helps homeowners make informed decisions about loans, renovations, or selling. Rules, taxes, and lending practices vary by jurisdiction, so verify specifics with qualified local professionals before taking action.