How Does Home Equity Work?

Home equity can be a valuable financial tool. It can help you consolidate debt, fund renovations that will increase your home’s value or even pay for college tuition. However, it’s important to understand how home equity works so you can make smart choices about tapping into this asset.

Simply put, home equity is the difference between a property’s current market value and what you still owe on your mortgage. You build home equity through making regular mortgage payments and by accumulating additional equity through the property’s appreciation. Your home’s value may also increase over time due to things like a strong local real estate market, population growth or changing trends.

Home Equity Loans: Everything You Need to Know

You can calculate your home’s current market value by visiting online resources such as Zillow and Redfin. You can also get an accurate estimate from a real estate professional or request an appraisal. Once you have a clear idea of your property’s value, subtract the amount you owe on your mortgage to find out how much home equity you own.

If you have enough equity, you can access it via a home equity loan or line of credit (HELOC). The advantage to this type of financing is that it often comes with less stringent requirements than personal loans or credit cards. You’ll likely get a lower interest rate, too. And, depending on the type of home equity loan, some or all of your interest may be tax deductible.

However, using home equity can be a trap for those who don’t stay focused on their financial goals and end up living beyond their means. When you use your home as collateral, it’s best to stick with needs versus wants and make sure the expense will improve your financial position.