Homeownership

Home Equity Guide

Understanding home equity, how to build it, and smart ways to access it through HELOCs, home equity loans, and cash-out refinancing.

NMHL Team2026-01-0111 min read

What Is Home Equity?

Home equity is the difference between your home's current market value and the outstanding balance on your mortgage. If your home is worth $400,000 and you owe $250,000, you have $150,000 in home equity. Equity builds over time through mortgage payments that reduce your loan balance and through home price appreciation. Home equity is one of the most significant sources of wealth for American families, and understanding how to build and leverage it is essential for long-term financial planning. Your equity changes as home values fluctuate and as you pay down your mortgage balance.

American homeowners collectively hold over $32 trillion in home equity, making it the largest source of household wealth in the United States.

How to Build Home Equity

There are several strategies to build home equity faster. Making extra mortgage payments, even small ones, accelerates principal reduction significantly. Switching from a 30-year to a 15-year mortgage dramatically increases the pace of equity building. Making a larger down payment when purchasing gives you instant equity. Home improvements that increase property value add equity, though not all improvements return their full cost. Natural market appreciation builds equity without any effort on your part, though this varies by location and market conditions. Avoiding cash-out refinancing preserves existing equity. Even rounding up your monthly payment builds equity faster over time.

Key Tips

  • One extra mortgage payment per year can shave 4-6 years off a 30-year mortgage
  • Focus home improvements on kitchens, bathrooms, and curb appeal for the best equity return
  • Set up bi-weekly payments instead of monthly to make one extra payment per year automatically

Ways to Access Your Home Equity

When you need to access your home equity, you have three primary options. A Home Equity Line of Credit (HELOC) provides a revolving line of credit you can draw from as needed, similar to a credit card, with variable interest rates. A home equity loan provides a lump sum with a fixed interest rate and fixed monthly payments. A cash-out refinance replaces your existing mortgage with a larger one, giving you the difference in cash. Each option has advantages: HELOCs offer flexibility, home equity loans offer predictability, and cash-out refinances can be advantageous when current rates are lower than your existing mortgage rate.

Most lenders allow you to borrow up to 80-85% of your home's value through equity products. On a $400,000 home with a $250,000 mortgage, you could access up to $70,000-$90,000.

Smart Equity Strategies

Using home equity wisely can accelerate wealth building, while misusing it can put your home at risk. Smart uses include home improvements that increase property value, consolidating high-interest debt to save on interest, funding education that increases earning potential, and purchasing investment properties. Risky uses include funding lifestyle expenses, purchasing depreciating assets like cars or vacations, and over-leveraging your property. Remember that your home secures these loans, so failing to repay can result in foreclosure. Consider whether the use of equity will generate a return or improve your financial position before borrowing against your home.

Key Tips

  • Use equity for investments that build wealth, not for consumption
  • Maintain at least 20% equity in your home after borrowing to avoid being over-leveraged
  • Compare HELOC rates across multiple lenders as they vary significantly
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Related Guides

Mortgage Refinancing Guide

Cash-out refinancing as an equity access strategy.

Investment Property Financing

Using equity to fund investment property purchases.

Home Appraisal Guide

Appraisals determine your home's value for equity calculations.

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Frequently Asked Questions

Most lenders require you to maintain at least 15-20% equity after borrowing. So if your home is worth $400,000, you need to keep at least $60,000-$80,000 in equity. The maximum you could borrow would be your home's value minus 15-20% minus your current mortgage balance.

A HELOC is better when you need ongoing access to funds over time, such as for a renovation project with multiple phases. A home equity loan is better when you need a specific lump sum with predictable payments, such as for debt consolidation. HELOCs have variable rates while home equity loans have fixed rates.

Home equity loan and HELOC interest is tax deductible if the funds are used to buy, build, or substantially improve the home that secures the loan. Interest on funds used for other purposes, like debt consolidation or personal expenses, is generally not deductible under current tax law. Consult a tax professional for advice specific to your situation.

Related Resources

Mortgage Refinancing Guide

Cash-out refinancing as an equity access strategy.

Investment Property Financing

Using equity to fund investment property purchases.

Home Appraisal Guide

Appraisals determine your home's value for equity calculations.

Conventional Loans

Conventional loans are not backed by government agencies and typically offer the most flexibility for qualified borrowers. With options for as little as 3% down and the ability to cancel mortgage insurance, conventional loans are ideal for borrowers with good credit.

Jumbo Loans

Jumbo loans exceed conforming loan limits and are designed for luxury properties and homes in high-cost areas. With competitive rates and flexible terms, our jumbo loan programs help you finance your dream home without limits.

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