Home equity explained
Home equity is the part of your home that you truly own. It’s calculated by taking the current value of your home and subtracting what you still owe on your mortgage.
For example, if your home is worth $600,000 and you owe $400,000, your home equity is $200,000. As you pay off your mortgage or if your home’s value increases, your equity can grow.
Many homeowners use their equity for different reasons. You might tap into it to pay for home renovations, consolidate debts, or finance a second mortgage or investment property. This is usually achieved through a home equity loan or a line of credit, which allows you to borrow money based on your home’s equity.
What is a home equity loan?
A home equity loan is a type of mortgage that allows you to borrow money using the equity in your home as collateral. Essentially, you take out a loan based on the difference between your home’s current value and the amount you owe on your mortgage.
What is usable equity and how is it calculated?
Usable equity refers to the amount of equity you can actually access for borrowing, while equity is simply the total value you own in your home.
For instance, if your home is worth $700,000 and has $300,000 in equity, not all of that may be available to use. Lenders typically allow you to borrow up to 80% of your home’s value, minus what you still owe on your mortgage. In this case, your usable equity would be calculated as $560,000 (80% of the property value) minus $400,000 (your mortgage balance), giving you $160,000 in usable equity.
Examples of calculating home equity
Property value | $400,000 |
|---|---|
Mortgage balance | $300,000 |
Home equity | $100,000 |
Usable equity | $20,000 |
Property value | $600,000 |
Mortgage balance | $400,000 |
Home equity | $200,000 |
Usable equity | $80,000 |
Property value | $800,000 |
Mortgage balance | $500,000 |
Home equity | $300,000 |
Usable equity | $140,000 |
Property value | $1,000,000 |
Mortgage balance | $600,000 |
Home equity | $400,000 |
Usable equity | $200,000 |
Property value | $1,200,000 |
Mortgage balance | $700,000 |
Home equity | $500,000 |
Usable equity | $260,000 |
Property value | $1,400,000 |
Mortgage balance | $800,000 |
Home equity | $600,000 |
Usable equity | $320,000 |
| Property value | Mortgage balance | Home equity | Usable equity |
|---|---|---|---|
$400,000 | $300,000 | $100,000 | $20,000 |
$600,000 | $400,000 | $200,000 | $80,000 |
$800,000 | $500,000 | $300,000 | $140,000 |
$1,000,000 | $600,000 | $400,000 | $200,000 |
$1,200,000 | $700,000 | $500,000 | $260,000 |
$1,400,000 | $800,000 | $600,000 | $320,000 |
As shown in the table above, the amount of usable equity can vary greatly based on your property’s value and how much equity you’ve built up. This usable equity can be used for various financial needs, such as paying off credit card debt, making home improvements, or purchasing an investment property.
