Home Equity
Home equity is the portion of your home you own outright — the difference between market value and what you still owe. Learn how equity builds, how to access it with a HELOC or cash-out refinance, and how it affects your financial options.
Definition
Home equity is the current market value of your home minus your outstanding mortgage balance. It represents the share of the property you own outright.
Equity = Current home value − Outstanding mortgage balance
How equity builds over 20 years
Example: $500,000 purchase, $400,000 loan (20% down), 7.25% 30-year fixed, 3% annual appreciation:
| Milestone | Home value | Loan balance | Equity | Equity % |
|---|---|---|---|---|
| Purchase (Year 0) | $500,000 | $400,000 | $100,000 | 20% |
| Year 3 (3% apprec.) | $546,000 | $387,000 | $159,000 | 29% |
| Year 5 (3% apprec.) | $580,000 | $378,000 | $202,000 | 35% |
| Year 10 (3% apprec.) | $672,000 | $352,000 | $320,000 | 48% |
| Year 20 (3% apprec.) | $903,000 | $271,000 | $632,000 | 70% |
Ways to access your equity
HELOC
~Prime + 1–2%
Revolving credit line. Variable rate, draw as needed. Best for ongoing or uncertain costs. Does not disturb your first mortgage rate.
Home Equity Loan
Fixed, ~7.5–9%
Lump-sum second mortgage at a fixed rate. Predictable payments. Good for one-time large expenses.
Cash-Out Refinance
~First mortgage rate
Replace your mortgage with a larger one. Access equity as cash at closing. Makes sense only if the new first-mortgage rate is near your current rate. See the HELOC vs cash-out comparison.
LTV thresholds that matter for equity
Your loan-to-value ratio (LTV) determines which financial options are open to you:
- Above 97% LTV — Very limited conventional options; typically requires FHA or special first-time buyer programs.
- 95% LTV — Conventional financing available with PMI; 3% down minimum for Fannie/Freddie.
- 90% LTV — PMI required; lower PMI rate than 95%.
- 80% LTV — PMI elimination threshold. Below 80%, no PMI on conventional loans. This is the most important equity milestone for most buyers.
- Below 80% LTV — Eligible for HELOC and home equity loans at better rates. Maximum CLTV for most equity products is 80–85%.
Common questions
How does equity build over time?
Equity grows through two mechanisms: (1) loan paydown — each mortgage payment reduces your principal balance, and (2) price appreciation — when the home's market value rises, your equity increases even without paying down the loan. Early in a mortgage, principal paydown is slow (most of your payment goes to interest), so appreciation often drives more equity growth in the first several years. Use an amortization schedule to see exactly how much principal is paid each year at your rate.
What is the difference between a HELOC and a home equity loan?
A HELOC (Home Equity Line of Credit) is a revolving credit line — you draw as needed, repay, and draw again, up to the limit. The rate is variable, typically prime + margin. A home equity loan (second mortgage) disburses a lump sum at a fixed rate, with level payments over a set term. HELOCs work well for ongoing or uncertain costs (renovations, college tuition); home equity loans suit one-time needs where you want payment predictability. Both require the home as collateral. See the HELOC vs cash-out refinance comparison for current rate math.
How much equity do I need to access it?
Most lenders require you to retain at least 20% equity after borrowing — meaning you can access up to 80% of your home's appraised value minus your mortgage balance. This is called the combined loan-to-value (CLTV) limit. Example: $600,000 home, $350,000 mortgage balance. Max CLTV at 80%: $480,000. Available equity: $480,000 − $350,000 = $130,000. Some lenders allow CLTV up to 85–90%, but at a higher rate.
Can I lose my home equity if prices fall?
Yes. If your home's market value falls, your equity decreases by the same amount. If your loan balance exceeds the home's value (negative equity, or "underwater"), you cannot sell without bringing cash to the table. The CoreLogic Homeowner Equity Insights report tracks negative equity rates by metro quarterly. In 2023–2026 with elevated prices, negative equity rates have been historically low — but markets that appreciated sharply (Phoenix, Austin, Boise) have seen localized pullbacks.
Is home equity taxable?
Accumulated equity itself is not taxed. When you sell, up to $250,000 of capital gain ($500,000 for married couples) is excluded from federal taxes under the Section 121 exclusion if you have lived in the home for 2 of the past 5 years. Gains above the exclusion are taxed at long-term capital gains rates. Interest on a HELOC or home equity loan is only deductible if the funds are used to "buy, build, or substantially improve" the home under post-2017 tax law.