What Is Home Equity?
Last updated September 2026
Quick answer
Home equity is your home's current market value minus everything you still owe against it. If your home is worth $500,000 and your mortgage balance is $400,000, your equity is $100,000 — 20% of the home. It grows two ways: you pay the mortgage down, and the home's value rises. Only one of those is under your control.
home equity = current market value − total debt secured by the homeThe formula
Worked through:
| Home's market value | $500,000 |
| Mortgage balance | − $400,000 |
| Home equity | $100,000 |
| Equity as a percentage | 20% |
Two things people commonly get wrong:
- Use current value, not purchase price. What you paid in 2019 is irrelevant to what you own today.
- Include all debt secured by the home. A home equity loan, a HELOC balance, a second mortgage, or a contractor's lien all subtract. If you have a $400,000 mortgage and a $50,000 HELOC drawn, your equity is $50,000, not $100,000.
The two engines of equity growth
1. Paying down the mortgage
Every dollar of principal you repay converts a dollar of debt into a dollar of equity. This is slow at first, because early payments are mostly interest. On our $400,000 loan at 6.25%, the first payment sends only $379.54 to principal — so month one adds $379.54 of equity, not $2,462.87.
2. Appreciation
If the home's value rises, your equity rises by the full amount of the increase — the mortgage does not grow with it. This is usually the larger contributor, and it is entirely outside your control. It can also run backwards.
Here is how the two compare over ten years on a $500,000 home with our $400,000 loan:
| Appreciation | Value at year 10 | Balance | Equity | From paydown | From appreciation |
|---|---|---|---|---|---|
| 0%/yr | $500,000 | $336,951 | $163,049 | $163,049 | $0 |
| 2%/yr | $609,497 | $336,951 | $272,546 | $163,049 | $109,497 |
| 3%/yr | $671,958 | $336,951 | $335,007 | $163,049 | $171,958 |
| 5%/yr | $814,447 | $336,951 | $477,497 | $163,049 | $314,447 |
At a typical 3% a year, appreciation contributes $171,958 against paydown's $163,049 — slightly more than half your equity comes from the market rather than your payments.
Which is why equity can fall
If values drop 10% in year three, your balance keeps falling on schedule but your equity takes an immediate hit. Homeowners who bought at the 2006 peak spent years "underwater" — owing more than the home was worth — despite never missing a payment. Appreciation is the bigger engine and the unreliable one.
How equity builds over time
Assuming no appreciation at all, so you can see the paydown effect on its own:
| Year | Balance | Equity | Equity % |
|---|---|---|---|
| 0 | $400,000 | $100,000 | 20% |
| 1 | $395,313 | $104,687 | 21% |
| 5 | $373,349 | $126,651 | 25% |
| 10 | $336,951 | $163,049 | 33% |
| 15 | $287,241 | $212,759 | 43% |
| 20 | $219,350 | $280,650 | 56% |
| 25 | $126,630 | $373,370 | 75% |
| 30 | $0 | $500,000 | 100% |
Look at the shape. Ten years of payments — a third of the loan — buys 13 percentage points of equity. The last ten years buy 44. Equity accumulates slowly, then quickly, for the same reason interest is front-loaded: your balance is largest at the start.
Loan-to-value: equity's mirror image
Lenders talk in LTV rather than equity, but it is the same number inverted:
LTV = mortgage balance ÷ home value
$400,000 ÷ $500,000 = 80% LTV → 20% equityThe number matters because of thresholds:
| LTV | Equity | What it unlocks |
|---|---|---|
| Above 80% | Under 20% | PMI usually required on a conventional loan |
| 80% | 20% | You can generally request PMI cancellation |
| 78% | 22% | PMI must be removed automatically by law (US, conventional loans, based on the original amortization schedule) |
| Below 80% | Over 20% | HELOCs and home equity loans become available; better refinance terms |
Reaching 20% when you started below it
Our example loan is already at 80% LTV, so there is no PMI to remove. Consider instead a 10%-down buyer on the same $500,000 home — a $450,000 loan at 90% LTV, payment $2,770.73:
| Scenario | Reaches 80% LTV at | Time |
|---|---|---|
| Minimum payments | Payment #92 | about 7 yrs 8 mos |
| +$200/month extra | Payment #67 | 25 months sooner |
Twenty-five months of PMI premiums avoided — a saving that sits on top of the interest saved.
How to find your actual equity
- Get a realistic value. An online estimate is a starting point, not an answer — they can be off by 10% or more. Recent sales of genuinely comparable homes nearby are better; a paid appraisal is definitive, and is what a lender will require anyway.
- Get your exact payoff balance. Not last year's statement, and not the original loan amount. Your current balance.
- Subtract every secured debt. Mortgage, second mortgage, HELOC drawn balance, any liens.
- Be conservative. If you would actually be selling, subtract 6–10% for agent commissions and closing costs. That is your usable equity.
Equity on paper vs. money in hand
$100,000 of equity does not mean $100,000 available. Selling costs 6–10%. Borrowing against it means a new loan with interest and fees, and most lenders will not let you take total borrowing above 80–85% of value. Equity is wealth, but it is the least liquid wealth you own.
What changes your equity
| Increases it | Decreases it |
|---|---|
| Each mortgage payment's principal portion | Falling home values |
| Extra principal payments | Borrowing against the home (HELOC, second mortgage, cash-out refinance) |
| Rising home values | Missed payments that capitalise interest |
| A larger down payment at purchase | Selling costs, when you actually realise it |
| Renovations, sometimes — most return well under 100% of their cost | Deferred maintenance that reduces value |
Run your own numbers
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The figures on this page are an example loan. MortMetrix builds your full amortization schedule from your real balance, rate and term, then shows exactly what any extra payment does to your payoff date, lifetime interest and equity.
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Frequently asked questions
How do I calculate my home equity?
Subtract everything you owe against the home from its current market value. A $500,000 home with a $400,000 mortgage balance has $100,000 of equity, or 20%. Include any HELOC balance, second mortgage or lien in the subtraction.
Does my down payment count as equity?
Yes. A 20% down payment on a $500,000 home gives you $100,000 of equity on day one — it is the fastest equity you will ever build, which is much of the argument for a larger down payment.
How much equity do I need to remove PMI?
Generally 20% (80% LTV) to request cancellation, and 22% (78% LTV) for automatic removal under US law on conventional loans. On a $450,000 loan against a $500,000 home, minimum payments reach 80% LTV at about payment #92; an extra $200 a month gets there 25 months sooner.
Can home equity go down?
Yes — if your home's value falls, or if you borrow against it. Your mortgage balance keeps dropping on schedule, but equity is value minus debt, so a falling value reduces it directly. A large enough drop puts you underwater, owing more than the home is worth.
Is home equity real money?
It is real wealth but not liquid cash. Accessing it means selling (6–10% in costs) or borrowing against it (a new loan with interest, and usually capped so total borrowing stays under 80–85% of value). Treat it as net worth, not as savings.
Related guides
How to Pay Off Your Mortgage Early
Seven ways to clear a mortgage ahead of schedule, each with the years and interest it saves.
Read moreWhat Is Mortgage Amortization?
The schedule that splits every payment between interest and principal — and why the split shifts.
Read moreHow to Read a Mortgage Amortization Schedule
A column-by-column tour, plus the three rows that tell you almost everything.
Read moreHow Mortgage Payments Build Equity
Only principal builds equity. See the slow-then-fast curve, and how extra payments and appreciation change it.
Read moreFigures on this page are generated from the same amortization engine that powers the MortMetrix dashboard, using the example loan stated in each table. They are estimates based on a fixed-rate loan at a constant rate and are not your actual loan terms. This is educational information, not financial advice.