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Explore helpful articles about buying a home, refinancing, home equity, and second mortgages.
Learn Why the Equity in Your Home Matters
Home equity is the current value of your home minus all outstanding loans secured by it. If a $250,000 purchase also reflects the home's value, and a $225,000 mortgage is the only lien, a $25,000 down payment produces $25,000 of initial equity. Your equity can later increase or decrease.
How Can Your Home Equity Increase?
Your home equity can increase in two key ways: by paying down your mortgage principal and through appreciation in your home's value.
- Paying Your Mortgage: The principal portion of each payment reduces your balance and builds equity. On a standard amortizing loan, early payments contain more interest because the balance is larger. Extra principal payments can accelerate repayment. A true biweekly schedule uses 26 half-payments per year, not just two payments each month. Confirm fees and principal allocation with your servicer.
- Home Appreciation: Your equity also grows as your home's market value increases. For instance, if you bought your home five years ago for $250,000 and the current market value is $300,000, that $50,000 increase becomes part of your home equity. Keep in mind, however, that if housing prices fall, your home equity may decrease accordingly.
How Can You Calculate Your Home Equity?
To calculate your home equity, start by estimating your home's current market value. Websites like Zillow or Redfin can give you an idea, but for a more accurate valuation, you may need to hire a professional appraiser (which comes with a fee).
Next, subtract your remaining mortgage balance (found on your latest mortgage statement) and any other home loans from the estimated market value. This calculation gives you an estimate of your home equity.
Example Calculation:
- Current fair market value: $275,000
- Current mortgage balance: - $150,000
- Current balance on a second home loan: - $25,000
- Estimated home equity: $100,000
Why Does Your Home Equity Matter?
Your home equity represents a significant financial asset that can benefit you in several ways:
- Removing PMI: For many conventional loans, cancellation depends on the first mortgage balance relative to the home's original value and other conditions, rather than a universal current-equity percentage. Appreciation-based cancellation may follow separate rules. Ask your servicer about the requirements, especially if you have a second mortgage.
- Accessing Cash: Available equity may support a cash-out refinance or a separate second mortgage for eligible expenses. These are new borrowing obligations secured by your home, not a withdrawal of money from a savings account.
- Refinancing Opportunities: A strong equity position can also help you secure better refinancing options. Lenders prefer borrowers with a lower loan-to-value (LTV) ratio and may offer lower interest rates or better loan terms.
What is "Tappable Equity"?
"Tappable equity" is the estimated borrowing capacity under a particular loan program's LTV or combined-LTV limit after existing liens are considered. Limits vary, and you generally cannot borrow all your equity. The following example assumes an 80% maximum LTV for a cash-out refinance; it is not a universal limit or an eCash second-mortgage quote.
Example Calculation:
- Current fair market value: $375,000
- Current mortgage balance: - $225,000
- Estimated home equity: $150,000 (40% of the home's value)
- Maximum new mortgage balance: - $300,000 (to retain 20% equity)
- Estimated tappable equity: $75,000 ($300,000 - $225,000)
Under this hypothetical 80% LTV limit, the gross difference is $75,000 before closing costs, other liens, and adjustments. Your approved amount and net cash can be lower.
What is a Gift of Equity?
A gift of equity may arise when an eligible seller provides part of the property's equity as a credit to the buyer. For a conventional loan, donor eligibility and documentation depend on the program; not every friend qualifies. It is documented in the transaction rather than transferred as cash.
An eligible gift of equity may be used toward a down payment or closing costs under applicable program rules. A standard conventional purchase at 80% LTV or less generally avoids PMI. The lender must verify the value, donor, gift, and any required borrower contribution.
These transactions typically need valuation, a signed gift letter, and a settlement statement showing the gift. Closing costs still apply. The donor may need a gift tax return, but reporting does not automatically mean gift tax is due; consult a tax professional.