What Is Home Equity and How Can I Use It?
5 Min Read | Last updated: May 20, 2026
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Unlock your home equity wisely. Explore its uses, benefits, and risks to make the best financial choice for you.
At-A-Glance
- Home equity is the current value of your home minus your mortgage balance.
- You can use home equity in a number of different ways. You may opt to pay off debt or cover home renovations, repairs, and upgrades.
- You’ll want to carefully consider the pros and cons of tapping into home equity before opting for a home equity loan or home equity line of credit (HELOC).
Homeownership comes with many benefits, including access to your home’s equity as it increases in value over time. Tapping into that equity with a home equity loan or line of credit can help you achieve several financial goals and make critical improvements to your home. Still, it’s important to understand the risks so you can make an informed decision. We’ll explore what home equity is, what you can do with it, and factors you’ll want to consider before accessing it.
What Is Home Equity?
Put simply, home equity is the difference between what you owe on your mortgage and your home’s current market value. It describes the amount of your home that you own outright. The simplest way to calculate your available equity is by subtracting your principal mortgage amount from your home’s estimated value. For example, if you owe a principal of $250,000 and your home is valued at $350,000, your available equity would be $100,000. While you may not have much equity at first, these factors all contribute to building more over time:
- Down Payment
The size of your down payment directly contributes to your home equity since it decreases the amount you have to borrow. - Appreciation
Appreciation refers to the increase in a property’s value over time. As a home appreciates, so does home equity. Appreciation varies depending on factors including the housing market and appraisals. - Mortgage Payments
Your mortgage payments typically consists of principal, interest, escrow, and mortgage insurance in some cases. The principal portion of your mortgage payment goes toward the original sum of money you borrowed to pay for your home. As the principal decreases, equity builds. - Additional Principal Payments
Making extra payments toward your principal can help build equity and pay down your mortgage faster. - Home Renovations and Upgrades
Improving your home with certain renovations and upgrades may increase your home’s value. A few examples of improvements you can make include kitchen remodels, energy-efficient appliances, and deck or patio additions. However, not all improvements will increase your home’s value.
Your home can also lose equity if the property value decreases or if you borrow against it. That makes it important to understand how to use your home’s equity to your advantage and when to seek alternatives.
How to Use Home Equity
If you have a certain amount of equity in your home, you may be able to borrow against it through a home equity line of credit (HELOC), home equity loan, or a cash-out refinance. Here’s the difference between the three:
Home Equity Loan
A home equity loan provides a lump sum of money up front. It has a fixed loan term and a fixed interest rate. Home equity loans work well for large predictable costs like simple home repairs, college tuition, or debt consolidation.
Home Equity Line of Credit (HELOC)
A HELOC acts as a revolving line of credit and allows you to withdraw funds up to a certain limit, similar to a credit card. It may also have a variable interest rate with the option to apply a fixed interest rate to a portion or all of your balance. There’s typically a limited draw period of five to 10 years to use the funds from your HELOC, followed by a 10 to 20-year repayment period.1 These are better suited for fluctuating costs such as complex home renovations or emergencies.
Cash-Out Refinance
A cash-out refinance involves taking out a new, larger mortgage to replace your current one and receiving a lump-sum payment for the equity you’re borrowing against.2
Borrowing against your home’s equity can help you achieve several goals. Some common ways to use borrowed equity include:
- Pay Off Debt
Consolidating high-interest debt with your home equity can help you save money on interest and potentially repay debts faster. - Home Renovations and Repairs
Using a home equity product to handle renovations and repairs allows you access to more funds than you might qualify for with a credit card or personal loan. - Upgrades
Home upgrades, like new windows or solar panels, are often expensive. Your home equity can make them more affordable compared to other financing options. - Large Expenses
Home equity can help finance large expenses such as college tuition, weddings, or medical bills.
Leveraging your home equity might seem like an effective way to pay off debt or take care of home repairs, but it doesn’t always make financial sense to do so. Before you decide to take out a home equity loan product, carefully consider the risks.
Did you know?
Lenders who offer home equity loans and HELOCs typically allow you to borrow 80% to 85% of your home’s equity.3
Important Considerations Before Using Home Equity
Tapping into your home’s equity isn’t a choice you should make lightly. Even though home equity is how much of the home you own outright, that doesn’t mean the money you’re borrowing is free. And in some cases, another financial product may be a better solution. These are the five primary risks behind borrowing from your home’s equity:
- Risk of Losing Your Home
If you can’t keep up with your payments, you could risk losing your home to foreclosure.4 Make sure you will be able to repay the loan before you take it out, and only borrow what you need. - Rising Interest Rates
Rising interest rates could make payments on a HELOC more expensive unless you lock in the interest rate on your balance. - Fees for Borrowing
Typically, cash-out refinance mortgages, home equity loans, and HELOCs are subject to closing costs, which make borrowing more expensive and are often unavoidable. - Bigger Payments
With each home equity loan product, you’ll be responsible for a higher monthly housing payment. - Longer Payoff Timeline
It may take longer to pay off your home after borrowing against its equity. That might interfere with your retirement, savings, or investing plans.
Carefully consider these factors, along with your reasons for obtaining the loan, when deciding whether borrowing against your home’s equity is a good idea. If the disadvantages outweigh the benefits, it may be worth considering a personal loan or line of credit as an alternative.
Frequently Asked Questions
Tapping into your home equity might be a good idea if the benefits outweigh the downsides. It may be more affordable than using higher-interest financing options to pay for home repairs or debt consolidation. However, it may not be feasible if you can’t afford larger housing payments without excessive strain on your budget. Otherwise, you may put your home at risk for foreclosure.
Many lenders offer home equity loans, HELOCs, and cash-out refinances. These include banks, credit unions, and online lenders. You may, however, find that each lender has different requirements for credit, loan-to-value ratios, borrowing amounts, and debt-to-income ratios. Each of these factors determines where you’ll be able to get a home equity loan product that works for your needs. Look for lenders that will accept your credit score and debt-to-income ratio. You’ll also want to have a specific loan amount in mind, as most lenders have minimum and maximum loan amounts.
Both a HELOC and a home equity loan will affect your credit score. If you apply for these financial products, you’ll see a hard inquiry on your credit report, which temporarily dings your score even if you’re not approved. If you are approved and make monthly payments on time, a HELOC or home equity loan may positively impact your credit score. Late payments, on the other hand, may damage it.
The Takeaway
Home equity is the amount of your home that you own. It’s the difference between your mortgage and your home’s current value. While you can use home equity to pay off debt and fund renovations, repairs, and upgrades, you should weigh the pros and cons and consider available alternative options before committing to a new loan.
1 “What is a Draw Period on a HELOC?,” Experian
2 “Cash Out Refinance,” Freddie Mac
3,4 “Using the Equity in Your Home to Borrow Money,” Federal Trade Commission
Anna Baluch is a personal finance writer from Cleveland, OH. She enjoys helping people from all walks of life make smart financial decisions. Her work can be seen on Credit Karma, Forbes, LendingTree, Insurify, and many other publications. Connect with Anna on LinkedIn.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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