What is home equity?

Home equity is the difference between your house's current market value and the balance on your mortgage.

It's often represented as a percentage: If your home is worth $200,000 and your mortgage is $160,000, you have 20% home equity. (If you paid cash for your home, you'd start out with 100% equity.)

If you financed your home purchase, your home equity will increase as you make mortgage payments. But there are other ways to accrue equity.

Find out how to calculate your home equity, what you can use it for and what to consider before you tap into it

To calculate your home equity, subtract your remaining mortgage balance from your property's current market value.

You can use an online home value estimator on sites like Zillow or Redfin for a general idea, but if you want a more accurate estimate, get in touch with a licensed appraiser.

Accruing enough equity in your home can allow you to:

1. Get rid of private mortgage insurance

If you have a conventional mortgage and put less than 20% down, your lender will require you to pay private mortgage insurance (PMI), which protects them in case you default on your mortgage. PMI typically costs between 0.5% and 1.5% of the loan total per year.

You can contact your lender and request cancellation of your PMI once you reach 20% equity in your home. When you reach 22% equity, most lenders will drop the requirement automatically.

2. Refinance your home loan

Refinancing your mortgage can offer plenty of benefits, including a lower interest rate or a different loan term. You typically need to have at least 20% equity to refinance.

Better and LoanDepot are

A cash-out refinance replaces your current mortgage with a larger one and lets you keep the difference. You typically need 20% equity in your home for a cash-out refinance, but the more you have, the more cash you can borrow.

Rocket Mortgage has an average closing timeline of just 21 days on cash-out refinances, less than half the industry average.

3. Take out a home equity loan or HELOC

Having money tied up in home equity doesn't mean you can't access it. A home equity loan allows you to borrow a lump sum that you pay back in installments over a specified period. Think of it as a large personal loan secured by your home.

The loan is repaid in addition to making your primary mortgage payments, so home equity loans are often referred to as second mortgages.

A home equity line of credit, or HELOC, is similar to a home equity loan but instead of a flat amount, you're approved for a revolving line of credit that you can tap during the draw period, which is usually between five and ten years. So long as you keep making payments, you can use more credit, similar to a credit card.

After the draw period ends, you'll make monthly payments during the repayment period, which can last up to 20 years.

Compare HELOC offers

Tapping your home equity can be an easy way to refinance or get access to cash, but it's not without risks.

Foreclosure. Remember that you are putting your home up as collateral. If you default on a home equity loan or HELOC, or are unable to meet your new refinancing, your lender could foreclose on your home.

Upside-down mortgage. If home values decline, you could end up owing more than your home is worth.

What are you using it for? The best use for home equity is on something that increases the value of your house, like home renovations or remodeling. If you need to pay off bills, it can be a lower-rate alternative to other financing, but you're still replacing one debt with another. Be sure you have a long-term plan to be able to pay it off. A wedding, vacation or even college tuition

Consider the alternatives: There are other options for borrowing that don't put your home at risk, including personal loans and credit cards. If you're trying to climb out of debt, look into balance transfer credit cards and debt consolidation loans. If you're trying to fund a home remodeling project, there are renovation loans and cards that are good for home renovation and that earn rewards.

Whether tapping your home equity is the right decision depends on your financial situation, risk tolerance and the rates and terms you're approved for.

Catch up on CNBC Select's in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.