Mortgage 101

How Do You Find Out the Equity in Your Home?

By Arlene Isenburg on October, 25 2021
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Arlene Isenburg

Homeownership is part of the American dream. And it’s the goal of every homeowner to own 100% of his home. That’s the point of a mortgage--a lender helps you buy a home, and with every payment, you earn more and more equity until, eventually, you pay back your entire loan and own the home free and clear. But why? Why does equity actually matter? In this article, we will explore the importance of home equity and what it means to you.

What Is Equity?

Equity is how much of your home is owned by you and you alone--not the lender. When you have a mortgage, you share ownership of your home with the lender, so you do not own 100% of it. You gain ownership and build equity as you pay the loan off. Your monthly mortgage payments pay off your loan (called the principal) as well as the interest on the loan. As the principal is paid down, your equity goes up. And over time, your equity builds, hopefully culminating in you owning your home outright and the bank having no ownership at all. But regardless of your mortgage payments, equity fluctuates over the years depending on your home’s value and the housing market, with equity increasing in hot housing markets and decreasing during market lulls. Equity matters for a myriad of reasons, which we’ll delve into more below.

What Is My Home’s Equity?

You don’t have to wonder how to calculate your home's equity; it’s a simple equation you can solve right now, you will just need to know your home’s value. You can calculate your equity by taking your home’s current value and subtracting your remaining loan balance. So if your home’s market value is $600,000 and you still owe $200,000, then your equity is $400,000. Hopefully, your equity will be a positive number.

Keep in mind that the value determined by your appraisal when you bought your home may or may not still be accurate, depending on time and other factors, including the current housing market. You can estimate your home’s current market value using online tools, or you may want to talk to an expert to get a better estimate. And of course, you can always reach out to your lender with any questions specific to your loan.

Why Is Home Equity Important?

Home equity is an asset that helps build wealth and even factors into your net worth. As a matter of fact, many see home equity as a homeowner’s single biggest financial asset. This is because, generally speaking, the value of your home increases over time. That is not the case with all assets, such as cars, which decrease in value. So with a house, you’re paying off a loan and building ownership as the value goes up. With a car, you’re paying off a loan and building ownership as the value goes down.

Equity is important for a number of reasons. When you decide to sell your home, your equity determines how much money you make on the sale. The more equity you have, the more money you will make. Keep in mind that with a mortgage, you share ownership of the home with your lender, so they also make money on the sale. If you sell your home after you’ve paid off your mortgage in its entirety, the lender will make nothing on the sale, and you will keep 100% of the money.

Equity can also be leveraged to borrow money if you need some extra cash, such as with a home equity loan, a home equity line of credit and cash-out refinance. With these loans, you are using your home equity as collateral in return for needed cash. They are all different and carry drawbacks, so be sure to educate yourself before giving up your equity to get a loan.

How to Build Equity

Equity builds slowly over time and should be viewed as an investment, but there are things you can do to increase your equity.

Make your mortgage payments. The most obvious way to build equity, as explained above, is by making your mortgage payments and paying down your loan balance. It may be slow, but consistently paying off your mortgage is the biggest way you can build equity, as you will owe less and less to the bank and own more and more of your home. If you want to speed up your equity build and pay down the principal faster, you can contact your lender and arrange for larger monthly payments. You can even refinance and get a shorter-term loan if that’s what you’re looking to do.

Larger down payment. Making a bigger down payment when buying your home will instantly increase your home equity because you own more of your home right off the bat and borrow less from the lender. A larger down payment also has other benefits, like lower closing costs, lower interest, and no private mortgage insurance, but it can drain your savings and has other drawbacks for you to weigh.

Adding value to the home. You can also build equity by adding value, since your home’s value factors into the equity equation. Home value can increase both actively and passively. You can actively increase your home’s value with home renovations, though some home improvements add more value than others (i.e. renovating your kitchen vs. finishing a basement vs. adding a bathroom). So be aware that you may not gain as much value as you think. But your home also appreciates over time, gaining value on its own as property values and the housing market increase over time. So in this case, you can passively build equity without doing anything but staying in your home as its value appreciates.

The Bottom Line

Equity matters. Whether you want to build wealth over decades, sell your home for a profit or take out a loan for extra cash, home equity is your biggest asset and has a huge impact on your long-term financial outlook and net worth. Like many investments, equity should be seen as a slow build, but you can speed up the process if you think that is the right move for you and your family.