Home equity

Before you rely on it

What to check

Subtract every lien, not just the first mortgage, and use a defensible current value.

The common error

Where people go wrong with home equity

Forgetting selling costs. Agent commission and closing costs come out of equity. So the amount that actually reaches the bank account is meaningfully less than the arithmetic suggests.

Worked through

Home equity in plain numbers

A home is worth $450,000 and the mortgage balance is $300,000. Equity is $150,000. The loan-to-value ratio is 66.7%; many lenders will let you borrow up to about 80% of the home's value in total, though limits vary. Eighty percent of $450,000 is $360,000, so with $300,000 already owed you might be able to borrow up to $60,000 more. Note the difference between having equity and being able to use it. Appraisal values, credit history, income and the lender's own rules all decide how much is available and at what cost. Borrowing against equity puts the home at risk if payments are missed.

Easily confused

Home equity and its neighbours

Home equity is not the home's value and not the sale proceeds; it is the value minus debts secured by the property. When selling, costs such as commissions and closing fees come out, so the cash you receive is lower than the equity on paper. Home equity is also different from a home equity loan or line of credit, which are borrowing products that use it as collateral. Negative equity, sometimes called being underwater, means you owe more than the home is worth. Equity grows through principal payments and rising values, and shrinks when values fall.

In real decisions

Where home equity turns up

Owners track equity to plan renovations, consolidate debt, fund education or decide when to sell; lenders use it to set limits and pricing; retirees consider it as a source of funds through sales or reverse mortgages. Tax treatment of borrowing against equity depends on how the money is used. A calculator gives a rough figure from the value you enter and the balance you owe. A professional appraisal or a comparative market analysis firms up the value.

Know the edges

Where home equity stops being reliable

Values are estimates until a sale happens. Market conditions change, and online estimates can be well off. Equity is not liquid, and borrowing has costs and risks. Fees, closing costs and interest reduce what you keep. This page is educational and not financial advice. Before borrowing against your home, compare the alternatives and make sure you can meet the payments comfortably.

Quick answers

What people ask about home equity

How much equity can I borrow against? Lenders commonly allow total borrowing up to a share of the home's value, often around eighty to eighty-five percent, and set limits by credit and income. Programs and terms vary.

Does a renovation increase equity? Sometimes. Improvements may raise value, but not always by their cost. Local comparables and condition matter.

Is home equity taxable? Not while unrealized. Selling can create a taxable gain, subject to exclusions in some places. Ask a tax professional about your case.

What is a home equity loan? A loan for a lump sum, secured by the home, usually at a fixed rate. It sits beside your first mortgage. A HELOC is a revolving line instead.