How Home Equity Works: How It Grows, Changes, and Can Be Used

Updated October 10, 2026

By Stacy Schlesinger | President, Platinum Lending Solutions | NMLS #252075

If you own a home, you've probably heard people talk about building equity.

Maybe you've seen an estimate of your home's value online, noticed your mortgage balance decreasing, or wondered whether you could use some of your equity for renovations or another financial goal.

But what does home equity actually mean?

And how do you know how much you have?

Home equity is the difference between your home's current market value and the amount you owe on mortgages and other debts secured by the property.

Your equity can increase as you pay down your mortgage or if your property's value rises. It can also decrease if property values fall or you borrow additional money against your home.

Understanding how equity works is important because it can affect your options when selling, refinancing, or considering another mortgage.

Here's what I recommend every homeowner understand.

What Is Home Equity?

Home equity represents the portion of your property's estimated value that isn't offset by debt secured by the home.

For example, let's say your home has an estimated market value of $600,000 and you owe $400,000 on your mortgage.

Your estimated equity would be $200,000.

That's the difference between what the property may be worth and what you owe against it.

However, there's an important distinction.

Having $200,000 in home equity doesn't mean you have $200,000 in cash available to spend.

Equity is part of the estimated value of your property. Accessing it may involve selling the home or obtaining financing secured by it.

Either approach can involve expenses, qualifications, and other considerations.

How Do You Calculate Home Equity?

The basic calculation is straightforward:

Estimated home equity = Current market value − Total debt secured by the home

Let's look at a hypothetical example.

Property information	Amount
Estimated current market value	$600,000
First mortgage balance	$400,000
Outstanding home equity loan balance	$50,000
Estimated home equity	$150,000

In this example, the homeowner has approximately $150,000 in equity, representing 25% of the home's estimated value.

The calculation includes both loans because both are secured by the property.

If the homeowner didn't have the additional $50,000 home equity loan, the estimated equity would be $200,000 instead.

This example assumes the estimated value is accurate and doesn't include selling expenses or other potential obligations.

The actual value and mortgage payoff amounts would need to be confirmed for a transaction.

How Does Home Equity Build Over Time?

There are several ways your equity can increase.

The two most common are reducing your mortgage principal and increases in your property's market value.

1. Paying Down Your Mortgage Principal

When you make a regular payment on a traditional amortizing mortgage, part of the principal and interest payment goes toward interest, and part reduces the amount you owe.

The principal portion is what reduces the outstanding loan balance and increases equity, assuming the home's value and other secured debts remain unchanged.

The interest portion is the cost of borrowing money. It doesn't reduce your mortgage principal.

With a typical fixed-rate amortizing mortgage, more of the early payments generally goes toward interest because the outstanding balance is higher.

As the balance decreases, a larger portion of the scheduled principal and interest payment generally goes toward principal.

This process is called amortization.

The Consumer Financial Protection Bureau explains how mortgage amortization works.

If you're interested in understanding the relationship between interest, principal, and the remaining loan balance, our Mortgage Calculator can help you explore different payment scenarios.

2. Increases in Property Value

Your equity can also increase when your home's market value rises.

For example, suppose you owe $350,000 on your mortgage.

If your home is worth $500,000, your estimated equity is $150,000.

If its market value later increases to $550,000 while the loan balance remains unchanged, your estimated equity increases to $200,000.

However, property appreciation isn't guaranteed.

Home values can increase, decrease, or remain relatively stable over time.

And the amount a buyer may be willing to pay for your home can differ from an online estimate or a previous appraisal.

I encourage homeowners not to base important financial decisions entirely on an assumed future increase in property value.

3. Making Additional Principal Payments

Some homeowners choose to make additional payments toward their mortgage principal.

When those funds are properly applied to principal, they can reduce the outstanding balance faster than the regular amortization schedule.

That can increase equity more quickly, assuming the home's value remains unchanged.

However, using extra savings to pay down a mortgage isn't automatically the appropriate decision for every household.

You also need to consider your interest rate, emergency savings, other debts, liquidity, and financial goals.

We'll cover that decision in detail in our article on making extra mortgage payments.

Can Your Home Equity Decrease?

Yes.

Home equity isn't a fixed amount.

Even if you make every scheduled mortgage payment, your equity can decline if your property's market value decreases sufficiently.

Additional borrowing secured by your home can also reduce your equity.

Consider this example:

Scenario	Home value	Total mortgage debt	Estimated equity
Starting position	$600,000	$450,000	$150,000
Home value increases 5%	$630,000	$450,000	$180,000
Home value decreases 10%	$540,000	$450,000	$90,000

Hypothetical illustration only. The scenarios hold secured debt constant to demonstrate changes in property value.

In the third scenario, the homeowner still has equity, but substantially less than before.

If a property's market value falls below the total debt secured by it, the homeowner may have negative equity, sometimes described as being underwater on the mortgage.

That's why I encourage homeowners to think of equity as an estimate that changes with both mortgage balances and market conditions.

How Do You Know What Your Home Is Worth?

Your home's market value is one of the most important parts of calculating equity.

But you may encounter several different estimates.

Online Home Value Estimates

Real estate websites and valuation tools may provide an estimated property value.

These estimates can be useful as a starting point, but they aren't guaranteed sale prices or necessarily acceptable for mortgage underwriting.

They may not fully reflect the home's current condition, renovations, unusual features, or recent neighborhood sales.

Comparable Property Sales

A real estate professional can help evaluate recent sales of similar homes in your area.

This may provide additional perspective on how the property compares with other homes buyers have recently purchased.

However, even comparable sales require adjustments for differences in property condition, size, features, and location.

Professional Appraisal

For certain mortgage transactions, the lender may require an appraisal or another acceptable property valuation method.

The purpose is to evaluate the property's value under the lender's applicable requirements.

The value used for mortgage financing may differ from an online estimate.

My advice: If you're making an important financing decision based on home equity, have the property's value evaluated using a method acceptable to the lender rather than relying exclusively on an online estimate.

What Is Loan-to-Value Ratio, and Why Does It Matter?

Mortgage lenders frequently use a measure called loan-to-value ratio, or LTV.

LTV compares the amount of a mortgage loan with the value used for the transaction.

For example, if you have a $400,000 first mortgage balance and your home's estimated value is $500,000, the simple LTV calculation is:

$400,000 ÷ $500,000 = 80% LTV

In this simplified example, your estimated equity is $100,000, or 20% of the property's value, assuming there are no other debts secured by the home.

However, when you're applying for a new loan, the lender must calculate LTV using the valuation method and program requirements that apply to that transaction.

What Is Combined Loan-to-Value?

If you have more than one loan secured by your property, lenders may also evaluate a combined loan-to-value ratio, commonly called CLTV.

For example, suppose your home is worth $500,000, you owe $350,000 on the first mortgage, and you have a $50,000 outstanding second mortgage.

Together, those balances total $400,000.

That represents an 80% combined loan-to-value ratio using the simplified current-value calculation.

Actual lender calculations can differ depending on the transaction and loan type.

For certain transactions involving a HELOC, lenders may consider the full available credit line rather than only the amount currently borrowed.

Fannie Mae provides a Loan-to-Value Ratio Calculator that can help homeowners understand these concepts.

Your mortgage professional can explain which calculation is relevant to the financing you're considering.

Does Having 20% Equity Mean You Can Remove Mortgage Insurance?

Possibly, but the rules depend on your mortgage.

For many conventional loans with borrower-paid private mortgage insurance, federal law provides certain cancellation and termination rights based primarily on the home's original value and the mortgage's scheduled or actual principal balance.

For example, eligible borrowers can generally request PMI cancellation when the principal balance reaches 80% of the original property value, provided the applicable conditions are satisfied.

For many covered mortgages, PMI must generally terminate automatically when the scheduled principal balance reaches 78% of the original value, assuming the borrower is current.

There are additional conditions and exceptions.

For example, the rules for FHA mortgage insurance differ from conventional PMI.

And although increases in current market value may provide other PMI cancellation opportunities under certain investor or servicer requirements, appreciation alone doesn't automatically eliminate mortgage insurance.

If you believe you have sufficient equity, contact your mortgage servicer to understand the requirements that apply to your loan.

For more information, read our guide to private mortgage insurance and the CFPB's explanation of when PMI can be removed.

What Can You Do With Your Home Equity?

As your equity increases, you may have additional financial options.

However, the fact that you have equity doesn't automatically mean you're eligible to borrow against it.

The financing available depends on your property's value, outstanding debt, income, credit, occupancy, and applicable loan-program requirements.

Use Equity When Selling Your Home

If you sell your property, the sale proceeds are generally used to pay off mortgages and other amounts required to complete the transaction.

The remaining funds, after applicable expenses and adjustments, may be available to you.

Some homeowners use those proceeds toward purchasing another home.

Others may decide to rent, downsize, relocate, or use the funds for other financial priorities.

However, estimated home equity isn't the same as your actual net sale proceeds.

We'll look at that difference in more detail below.

Consider a Home Equity Loan

A home equity loan allows eligible homeowners to borrow a specified amount using their property as collateral.

These loans are commonly structured as second mortgages when the homeowner already has an existing first mortgage.

Home equity loans often have fixed interest rates and scheduled repayment terms, although available structures vary by lender.

The borrower receives the loan proceeds, generally as a lump sum, and is responsible for making payments under the loan agreement.

Because the debt is secured by the property, failure to meet the repayment obligations can place the home at risk.

Consider a Home Equity Line of Credit

A home equity line of credit, or HELOC, is another form of financing secured by your home.

Rather than receiving the entire amount as one lump sum, a HELOC generally allows you to borrow up to an approved credit limit during a specified draw period.

Many HELOCs have variable interest rates.

That means the interest rate and payment can change.

You should also understand what happens when the draw period ends and the repayment period begins.

A payment that is manageable during the draw period may increase substantially under the repayment terms.

The CFPB explains how home equity lines of credit work, including their payment structures and potential risks.

Consider a Cash-Out Refinance

A cash-out refinance replaces your existing mortgage with a new loan for a larger amount.

After paying off the existing mortgage and applicable transaction costs, the borrower may receive the permitted difference in cash.

For example, a homeowner might explore this option to finance eligible property improvements or address another financial need.

However, a cash-out refinance isn't automatically more economical than keeping the existing mortgage and using another financing arrangement.

It can change your interest rate, loan balance, repayment period, and total borrowing costs.

If you currently have an interest rate that's substantially below the rate available on a new mortgage, replacing the entire loan may have significant financial implications.

The appropriate comparison depends on actual offers and your circumstances.

You can learn more on our Cash-Out Refinance page.

Home Equity Loan vs. HELOC vs. Cash-Out Refinance

Here's a general comparison of the three common ways homeowners may borrow against their equity.

Feature	Home equity loan	HELOC	Cash-out refinance
How funds are received	Generally a lump sum	Draws from an approved line	Cash proceeds from a new mortgage
Existing first mortgage	Usually remains in place	Usually remains in place	Replaced by a new mortgage
Rate structure	Often fixed	Often variable	Depends on selected mortgage
Repayment	Separate scheduled payments	Draw and repayment periods	According to new mortgage terms
Upfront expenses	Vary by lender	Vary by lender	Refinance closing expenses generally apply
Primary risk	Additional debt secured by home	Variable payments and additional secured debt	New loan terms, costs, and additional secured debt

These are general characteristics, not complete program terms.

The amount you may be eligible to borrow isn't necessarily the same under each arrangement.

Some financing programs also have additional requirements based on property type, occupancy, credit, or existing mortgage balances.

I encourage homeowners to compare the total borrowing cost and payment obligations before selecting an option.

How Much of Your Home Equity Can You Actually Borrow?

This is an important distinction.

Having $200,000 in estimated home equity doesn't mean a lender will necessarily allow you to borrow $200,000.

Most lenders establish limits on the total mortgage debt that can be secured by a property.

Those limits depend on the financing program and lender requirements.

For example, a lender may determine the maximum amount of financing based on its permitted LTV or CLTV ratio.

The amount available can also be affected by:

• Existing mortgage and other secured debt balances
• Property appraisal or accepted valuation
• Credit history and score
• Qualifying income
• Monthly debt obligations
• Property occupancy and type
• Available equity financing products
• Applicable fees and closing expenses

Some lenders also evaluate the borrower's ability to repay the new obligation.

Even if the property has substantial equity, you may not qualify to borrow the maximum amount theoretically available based on its value.

That's why a personalized financing review is necessary before relying on equity for another financial commitment.

Does It Make Sense to Use Home Equity to Pay Off Other Debt?

Sometimes homeowners explore home equity financing to consolidate credit cards, personal loans, or other obligations.

Depending on the actual terms, a loan secured by the home may have a different interest rate or monthly payment than certain unsecured debts.

However, there are important tradeoffs.

When you use home equity to repay unsecured debt, you're generally converting that debt into an obligation secured by your property.

That can create a more serious consequence if you later have difficulty making payments.

A lower monthly payment also doesn't automatically mean a lower total borrowing cost.

If repayment is extended over a longer period, the total interest paid may be higher even when the interest rate is lower.

For example, consolidating credit card debt into a long-term mortgage may reduce the required monthly payment but extend the repayment period substantially.

I encourage homeowners to review the new loan's rate, term, fees, total repayment cost, and the alternatives before making that decision.

The CFPB also recommends considering the risks before using a home equity loan to consolidate debts.

Is Home Equity the Same as Profit When You Sell?

No.

This is one of the most important distinctions for homeowners planning to sell.

Estimated equity is the difference between market value and secured debt.

Your actual net sale proceeds depend on what the property sells for and the expenses associated with completing the transaction.

For example:

Estimated sale calculation	Amount
Hypothetical sale price	$600,000
Mortgage and other secured debt payoff	−$380,000
Hypothetical selling expenses and adjustments	−$35,000
Illustrative net proceeds before any other applicable costs or taxes	$185,000

These are hypothetical figures. Actual selling expenses, obligations, prorations, possible taxes, and mortgage payoff amounts vary.

Even though the property's estimated equity before expenses was $220,000, the illustrative remaining proceeds are lower.

That doesn't necessarily mean the homeowner has earned $185,000 in profit.

Determining a financial gain or loss involves other considerations, including the original purchase cost, certain improvements, applicable selling expenses, and tax rules.

If you're selling one home and purchasing another, understanding your expected net proceeds is important when planning your next down payment.

Our article on selling your current home before buying another explains how that decision can affect your financing.

How Do Home Improvements Affect Equity?

Home improvements may increase your property's market appeal, usefulness, or value.

However, the amount you spend doesn't automatically translate into an equal increase in equity.

For example, spending $40,000 to remodel a kitchen doesn't guarantee the home's market value will rise by $40,000.

Some improvements may increase market value substantially, while others may primarily provide personal enjoyment or functionality.

The result depends on the property, the quality of the improvements, comparable homes, and buyer preferences.

Also remember that if you borrow money against the home to finance renovations, you're increasing the amount of debt secured by the property.

Even when the improvements increase its value, your net equity may not increase by the same amount.

My advice: Evaluate renovations based on your needs, the total expense, and realistic property values—not an assumption that you'll recover every dollar invested.

How Does Home Equity Work in Oregon and Washington?

The basic equity calculation is the same whether your property is in Oregon or Washington.

What can differ are the property values, local sales activity, housing expenses, and characteristics of the specific home.

For example, a homeowner in Wilsonville, Oregon, may be evaluating their current property's value before moving to another home.

A homeowner in Tacoma, Washington, might be considering whether available equity could support a renovation or another financing need.

In either situation, the important starting information is the property's estimated current value and all outstanding debts secured by it.

Online valuation estimates may provide a preliminary reference, but a lender may require a different valuation method.

The financing requirements also depend on the mortgage program, property, and borrower's financial qualifications.

I wouldn't assume that changes in home prices across Oregon or Washington automatically mean your individual property has gained the same amount of value.

Local comparable sales and property condition matter.

At Platinum Lending Solutions, we help homeowners throughout Oregon and Washington review available mortgage and refinance options based on their individual goals.

How Can You Track Your Home Equity?

You don't need to refinance or sell your property simply to develop an approximate understanding of your equity.

A practical approach is to periodically review:

1. Your mortgage principal balance. Your monthly statement generally provides information about the remaining amount owed.
2. Any other loans secured by the property. Include home equity loans, outstanding HELOC balances, and other applicable liens.
3. A reasonable estimate of current market value. Review comparable sales or other appropriate valuation information.
4. Changes over time. Consider whether loan balances, property values, or new borrowing have affected the estimate.

Keep in mind that a mortgage statement's principal balance may differ from the actual payoff amount required on a particular date.

A payoff statement can include accrued interest and other applicable amounts.

And an online home value estimate is not a substitute for a lender-approved appraisal or valuation when required.

You can use these figures to estimate equity, but a new financing or sale transaction will require more specific information.

Frequently Asked Questions

What is home equity in simple terms?

Home equity is the difference between your property's current estimated market value and the total amount of debt secured by it. For example, if your home is worth $500,000 and you owe $350,000 against it, your estimated equity is $150,000.

How do you build equity in a home?

Equity can increase as you repay mortgage principal or if the property's market value rises. Additional principal payments may reduce the loan balance more quickly. However, changes in property value aren't guaranteed.

Can home equity decrease?

Yes. Equity may decline if the home's market value decreases or if you borrow additional funds secured by the property. In some circumstances, a homeowner can owe more than the property is worth.

Can you have home equity without paying off your mortgage?

Yes. Homeowners frequently have equity while still making mortgage payments. Equity reflects the difference between the property's estimated value and the amount owed against it.

Is home equity money you can withdraw?

Not directly. Home equity is a measure of property value after accounting for secured debt. Accessing it generally requires selling the property or qualifying for financing, such as a home equity loan, HELOC, or cash-out refinance.

How much equity do you need for a HELOC?

Requirements vary by lender, property, and loan program. The lender generally considers the property value, existing mortgage balances, permitted loan-to-value ratio, credit, income, and other qualification requirements.

Does paying extra on your mortgage increase equity?

Additional payments applied to principal generally reduce the outstanding mortgage balance and increase equity, assuming property value and other secured debts remain unchanged. Whether making extra payments fits your financial goals is a separate decision.

Does home equity automatically remove PMI?

No. Conventional PMI cancellation and termination depend on applicable laws, loan terms, payment history, and servicer or investor requirements. FHA mortgage insurance follows different rules. Contact your servicer to review eligibility.

Is home equity taxable?

Simply having estimated equity in your home doesn't, by itself, mean you've received taxable income. However, selling a property or engaging in certain financial transactions can involve tax considerations. Consult a qualified tax professional about your circumstances.

Can you use home equity to buy another house?

Potentially. Some homeowners use sale proceeds or eligible home equity financing toward another property purchase. The available options depend on your qualifications, existing debts, property value, financing costs, and the requirements of the new mortgage.

The Bottom Line: Equity Is Valuable, but It Isn't the Same as Cash

Building home equity can be an important part of homeownership.

As you repay your mortgage and your property's value changes, the amount of equity you have may increase or decrease.

That equity can influence your options when selling, refinancing, or considering another financial commitment.

However, it isn't a guaranteed source of cash, and borrowing against it creates additional obligations secured by your home.

After more than 25 years in mortgage lending, I encourage homeowners to understand both their property value and their outstanding mortgage balances before making decisions involving equity.

The goal isn't simply to access as much equity as possible. It's to understand what you have, what options may be available, and the financial consequences of using it.

At Platinum Lending Solutions, we work with homeowners throughout Oregon and Washington to evaluate mortgage refinancing and other available financing options.

Whether you're planning a renovation, considering a future home purchase, or simply want to understand your mortgage better, I'm happy to discuss your goals.

Ask Stacy Your Mortgage Question

---

About the Author

Stacy Schlesinger is the President of Platinum Lending Solutions, an independent mortgage brokerage serving Oregon and Washington. With more than 25 years of mortgage lending experience, Stacy helps homebuyers evaluate financing options and navigate the mortgage process.

Stacy Schlesinger | NMLS #252075

Platinum Lending Solutions | Company NMLS #251560

Oregon License #ML-4475 | Washington License #WA CL-251560

Content reviewed October 10, 2026. This article is provided for general educational purposes and is not a commitment to lend, an offer of specific mortgage terms, or individualized investment, legal, or tax advice. Property values, equity estimates, financing eligibility, interest rates, costs, and loan terms depend on individual circumstances and applicable lender requirements. All loans are subject to credit approval.