Home equity is the portion of a house that the homeowner holds outright — the difference between the house's value and the total amount they owe on the home.
As their equity increases, homeowners can borrow against their home, sell a stake in the house for cash or sell the home for a profit.
Home equity is pretty easy to calculate. Here's how.
How to calculate home equity
To calculate home equity: subtract any outstanding debt on the house from the value of the house.
Home equity = value of home - outstanding debt on home
If a house is worth $500,000 and you have a $250,000 mortgage, your home equity is $250,000.
For an estimate of your home's current market value, speak to an appraiser or local realtor.
What to use home equity for?
Homeowners can use their home equity to access cash via home equity loans, home equity lines of credit (HELOCs), home equity investment contracts or cash-out refinances.
All of these are secured loans that use the home's value as collateral, so the lender can foreclose if the borrower falls behind on payments.
Home equity loans
A home equity loan allows homeowners to borrow a lump sum of cash based on how much equity they have. It typically requires a credit score of 650 or higher, a debt-to-income ratio of no more than 43% and at least 20% in home equity.
Lenders usually approve home equity loans for up to 80% of the value of the home, minus anything the borrower may still owe.
- Structure: Lump sum
- Loan amount: $10,000 to $500,000, up to 80% LTV
- Terms: Monthly payments over 5 to 30 years
Known for its standout customer service and easy-to-use online tools, industry giant Rocket Mortgage offers home equity loans for up to 90% of a house's value.
Rocket Mortgage Home Equity Loan
Annual Percentage Rate (APR)
Apply online for personalized rates
Loan minimum and maximum
Minimum: $45,000; Maximum: $500,000
Terms available
10, 20 years
Credit needed
680
Minimum equity required
10%
HELOCs
A HELOC, or home equity line of credit, allows a homeowner to access a line of credit secured by their house's value. During the first 10 years, they can draw up to their credit limit, while only making monthly interest payments.
In the repayment phase, which is usually 20 years, access to the line of credit is over and borrowers begin making payments on both the principal and interest until the debt is fully paid.
To apply for most HELOCs, borrowers need at least a 650 credit score, a debt-to-income ratio of 43% or less and at least 20% equity.
- Structure: Line of credit
- Loan amount: $10,000 to $6 million, up to 80% LTV
- Terms: Interest-only payments during the draw period, monthly principal-and-interest payments during the repayment phase.
Fintech company Figure will lend homeowners up to 85% of their home's value and offers fully remote closings in states where it's allowed.
Figure
Loan types
HELOC, DSCR, cash-out refinance, crypto-backed loan, small business loans
Minimum credit score
600
Maximum loan-to-value
85%
HELOC draw amount
$15,000 to $750,000
HELOC draw period
2 years or 5 years
Repayment period
10 years, 15 years, 20 years, 30 years
Availability
Figure HELOCs are available in all states but Hawaii.
Available APRs range from 6.75% to 14.35%, which includes the payment of a higher origination fee in exchange for a reduced interest rate, which is not available to all applicants or in all states. The lowest APRs are only available to the most qualified applicants, depending on credit profile and the state where the property is located, and those who also select ten year loan terms; APRs will be higher for other applicants and those who select longer loan terms. Your actual rate will depend on many factors such as your credit, combined loan-to-value ratio, loan term, occupancy status, and whether you are eligible for and choose to pay a higher origination fee in exchange for a lower rate. Rates change frequently so your exact APR will depend on the date you apply. APRs for home equity lines of credit do not include costs other than interest. You will be responsible for an origination fee of up to 4.99% of your initial draw, depending on the state in which your property is located and your credit profile. You may also be responsible for paying the costs of valuation if an AVM is not available for your property ($180), or an appraisal if your loan amount exceeds $400,000 ($500-$2,000, depending on property type, property value, and state), manual notarization if your county doesn't permit eNotary ($350), and recording fees ($0 - $315) and recording taxes, which vary by state and county ($0- $1,400 per one hundred thousand dollars borrowed). Property insurance is required as a condition of the loan and flood insurance may be required if your property is located in a flood zone.
Home equity investment
Homeowners can also receive cash by selling a portion of their home's current value and its future appreciation to an investor through a also known as a home equity contract or sharing agreement.
Repayment is due in one lump sum at the end of a predetermined term, usually 30 years or whenever the house is sold, whichever event comes first.
Homeowners need 20% home equity for a home equity investment, but only a 500 FICO Score, and there's no debt-to-income limit. This may appeal to those who want to leverage their home equity but are unable to borrow due to poor credit or lack of income.
- Structure: Lump sum
- Loan amount: Up to $600,000
- Terms: A portion of the house's current value and future appreciation in 30 years (or when the house is sold).
Home equity sharing company Hometap will purchase up to 20% equity in the home.
Hometap
Types of loans
Home equity investment
Terms
15 to 30 years
Credit needed
500
Minimum home equity required
25%
Minimum income requirement
None
Cash-out refinance
Borrowers can also tap into their equity through a cash-out refinance, swapping their current mortgage for a larger loan. Once they pay off their existing mortgage with the proceeds, they can use the remaining cash for any purpose.
Refinance candidates should have a credit score of 620 or higher, a debt-to-income ratio of 43% or less and at least 20% home equity.
- Structure: Lump sum
- Loan amount: Up to $9.5 million, up 80% to 85% LTV
- Terms: 5 to 30 years
Better has some of the lowest cash-out refinancing rates on the market and applicants can get preapproved in as little as three minutes.
Better Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loan, FHA loan, Jumbo loan and adjustable-rate mortgage (ARM)
Terms
10–30 years
Credit needed
620
Minimum down payment
3.5% if moving forward with an FHA loan
Terms apply.
How to increase your home equity
You can build home equity by increasing the value of your house or reducing what's owed on the property.
Usually, the housing market has the most significant influence on the value of a house, but home improvements are a cost-effective way to add value, too. A new steel entry door would be a 188% return on investment, for example, meaning it could add nearly double its cost to the value of the house.
The quickest and most reliable way to increase home equity is by making larger mortgage payments and putting the extra towards the principal.
If you can't reliably increase mortgage payments, you can put a lump sum towards the principal or refinance at a lower rate to put more towards the principal each month.
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Home equity FAQs
Is a HELOC better than a home equity loan?
It depends on how the borrower wants to receive the money and repay the funds. A HELOC is a line of credit with a draw period built into the first 10 years. During that time, the borrower can take out as much as they want up to the maximum draw and only has to make interest payments. They will repay the principal over the next 20 years. A home equity loan, on the other hand, is a lump sum that you will have to start repaying immediately.
Typically, a HELOC is preferred if the borrower is using the cash for an ongoing project and does not have a precise estimate of the amount they will need to borrow.
Is a home equity loan a second mortgage?
Yes, a home equity loan is often called a second mortgage. That means that the lender has a secondary claim to the property if the borrower fails to repay, after the primary mortgage holder.
What does LTV mean?
LTV stands for loan-to-value, a ratio used to express how large your combined home loans are to the overall value of the house. If a house is worth $500,000 and the owner's combined debts on the home are $400,000, they will have an LTV of 80%.
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