Equity can be a powerful tool for homeowners. And right now? Americans are sitting on tons of it.
In fact, according to data firm CoreLogic, US homeowners have about $335 billion in home equity as of the second quarter of 2023. The typical homeowner gained about $14,000 in equity just in that quarter alone.
“For most homeowners, home equity is their largest or second-largest financial asset — behind retirement accounts,” says Jonathan Mackinnon, vice president of product strategy at Hometap, a home equity investment company.
It all sounds great, in theory. But what exactly does it mean in action? And what can you do with your home equity once you have it? Here’s what you need to know.
What is home equity?
Equity is the ownership stake you have in an asset. So, when referring to home equity, we’re talking about how much your home is worth, minus any mortgages or loans against it (this gives you the stake of the home’s value that’s actually yours). Every time you make a payment on your mortgage, you increase your equity.
How much equity do I have in my home?
If you don’t know how much equity you have, you’re not alone. According to a 2021 Hometap survey, 43% of homeowners don’t. A whopping 53% of Millennials and 39% of Baby Boomers don’t even know how to calculate it.
To calculate your home equity, you need two numbers:
- The current value of your home (which is not necessarily what you paid for it)
- The total balance of any loans against the property.
“To get the most accurate current value of your home, you would obtain an appraisal of its current fair market value,” says Michael Micheletti, chief communication officer at Unlock Technologies, a home equity investment firm. “You may be able to get a good idea by looking at recent property tax assessments — check your county assessor’s website — or through third-party real estate sale platforms.”
Here’s an example of an equity calculation in action: Say your home is worth $350,000, and you have a mortgage balance of $75,000. You’d subtract the $75,000 balance from the $350,000 value, giving $275,000 in current home equity.
How home equity works
The amount of home equity you have is always in flux. As your mortgage balance increases or decreases and the value of your home changes, your equity stake changes, too.
To increase the amount of equity you have in your home, you have two options.
First, reduce your mortgage balance (and the balance on any other loans against the property). While making your normal monthly payments can help here, you can make an even bigger dent by switching to bi-weekly payments — splitting your payment in two and writing a check every two weeks instead of just once a month.
“Since not every month is exactly four weeks, homeowners will pay one extra full payment each year if they pay a half a payment every other week,” says Bill Banfield, executive vice president of capital markets at Rocket Mortgage. “That would add up to 26 half-payments every year. If a homeowner is able to make that additional payment each year, it could potentially shave years off their loan and thousands of dollars of payments while building up equity faster.”
Increasing your home’s value also gives you more equity. This might happen naturally as demand for real estate rises in your area, or you can intentionally increase its value through renovations, repairs, and other home updates.
“Improving your kitchen, bathrooms, or adding square footage can all increase the value of your home,” Mackinnon says.
What can you do with home equity?
As long as you sell it for its full market value, equity automatically equals profit when you sell your home. But beyond this, you can also borrow against your equity while you’re still living in the property.
“It can be a source of cash today or in the future that can be used to achieve a wide range of short- and long-term objectives — pay down debt, renovate your home, pay for education, invest in additional properties or your business, or help with retirement,” Mackinnon says.
Some ways to borrow against your home equity include:
- Cash-out refinancing: This is when you replace your current mortgage loan with a new, larger one. That loan pays off your old one, and you get the difference back in cash to use how you wish.
- Home equity loan: Home equity loans let you borrow a chunk of your home equity and pocket a lump sum of cash in return. You then repay it over an extended period of time (often up to 30 years) plus interest.
- Home equity line of credit (HELOC): HELOCs are similar to home equity loans, only you don’t receive a large cash payment. Instead, you can withdraw money from your home equity as you need it over time. It functions more like a credit card.
- Home equity investment: This is a newer strategy that allows you to sell a portion of your home’s future value for an upfront cash payment. The perk of these agreements is that they have no monthly payments. Your balance doesn’t come due until you refinance or sell your house.
Many people use home equity loans and HELOCs to pay off debts like credit cards and personal loans, as home equity products typically have much lower interest rates. (Credit cards are currently averaging nearly 21%, while home equity loan rates are between 8% and 9%. HELOC rates are around 9% to 10%).
Be smart about tapping home equity
If you do opt to borrow against your equity using a home equity loan, HELOC, or other product, make sure you’re prepared to make your agreed-upon payments for the long haul. Failing to make payments could put you at risk of foreclosure (and you could lose your house!).
You should also stay up to date on repairs and maintenance, too. Falling behind on upkeep could lower your home’s value and, in some cases, mean you owe more on the home than it’s worth.
“Home maintenance and the condition of your home will impact its valuation,” Mackinnon says. “Homes that need more work or are perceived to need work — particularly relative to others in the local area — are more likely to receive a lower valuation than homes that are maintained better or have newer features.”
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as the Home and Financial Services Editor for the Hearst E-Commerce team. Email her at email@example.com.