Home Equity

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Home equity is the difference between what your home is worth and what you still owe on it. If your home would sell for $400,000 and your remaining mortgage balance is $300,000, you have $100,000 of equity.

Equity grows in two ways. First, every mortgage payment reduces your principal — slowly at first, faster later, following the loan's amortization schedule. Second, if the home's market value rises, the gain is yours, not the lender's. Equity can also shrink if home prices fall.

Your starting equity is simply your down payment. Lenders track the mirror image of equity — the loan-to-value ratio — and many decisions hinge on it: reaching roughly 20% equity is what lets you remove PMI, and lenders limit cash-out refinancing to a share of your equity.

To see how fast a given loan builds equity, check the amortization schedule in our mortgage payment calculator.

Related terms: Loan-to-Value Ratio (LTV), Principal, Down Payment.