Home Equity 101: What It Is and How to Use It

by Teresa Davis

Home Equity 101: What It Is and How to Use It

Understanding your finances is the first step toward confident homeownership. Let’s break it down!

When you own a home, you're not just gaining a place to live—you’re building something powerful: equity. Unlike renting, where your monthly payment disappears into someone else's pocket, homeownership allows you to grow your wealth. Think of equity as your home’s superpower—it’s the difference between what your home is worth and what you owe on it.

In this post, we’ll break down what home equity really is, how to calculate it, why it matters, and some smart ways to use it.

💡 What Is Home Equity?

Home equity is the portion of your home that you truly “own.” It’s calculated by subtracting your mortgage balance from your home’s current market value.

📌 Formula:

Home Equity = Current Home Value – Mortgage Balance

🧮 Example:

Let’s say:

Your home is worth $325,000
You owe $210,000 on your mortgage

Your equity = $325,000 – $210,000 = $115,000

That $115,000 is your money. It’s the part of your home’s value that you’ve earned—whether through paying down the loan, home appreciation, or both.

💰 How Does Equity Grow?

Your equity grows in two main ways:

Paying Down Your Mortgage: Every time you make a payment, a portion goes toward reducing your principal loan balance.
Home Appreciation: If the market goes up and your home increases in value, so does your equity—even if you haven’t made extra payments.

🏗️ Why Equity Is a Beautiful Thing

Renting may feel flexible, but it doesn’t build long-term wealth. When you own your home, you’re investing in your future. That’s why equity is often called the “wealth-building” power of real estate. Every month you make a payment, you're one step closer to full ownership—and possibly unlocking financial opportunities.

📣 Equity is what you build when you stop renting and start owning.

💡 How Can You Use Home Equity?

Once you’ve built up equity, you can tap into it strategically. Here are a few ways homeowners use equity to their advantage:

1. Home Equity Loan or Line of Credit (HELOC)

Borrow against your equity to fund:

Home improvements (like a kitchen remodel)
College tuition
Medical bills
Debt consolidation

2. Cash-Out Refinance

Refinance your mortgage for more than you owe, and take the difference in cash.

3. Bridge Loan for Buying Your Next Home

Use your equity to buy before you sell—helpful when transitioning to a new home.

4. Investing in Real Estate

Use your equity to buy a rental or second home, growing your financial portfolio.

5. Emergency Reserve

Some people leave their equity untouched, knowing it’s there as a safety net.

🔍 When Should You Tap Into It?

Using your home’s equity can be smart—if you use it wisely. Before you borrow, consider:

Is this a want or a need?
Will this improve your home’s value or your financial future?
Can you comfortably manage the new monthly payment?

Working with a licensed mortgage professional (like me!) can help you weigh your options and understand the best path forward. I am also a licensed REALTOR®, so I can help give you an estimate of how much equity you may have.

🧭 Final Thoughts

Home equity isn’t just a number—it’s your leverage. It’s your reward for owning instead of renting. It can help you renovate, reinvest, or reduce stress during emergencies. It’s a powerful financial tool that grows with time and good decisions.

Whether you want to calculate your equity or explore options to use it, I’m here to help you unlock its full potential.