Home equity is what would be left in your pocket if you sold today, paid off the mortgage, and cleared any other charges secured against the property, such as a second lien, an unpaid tax bill, or a home equity line already drawn. It is a paper figure until you sell, refinance, or borrow against it, but lenders treat it as real collateral the moment your loan-to-value ratio crosses their threshold.
What counts as a healthy equity position
There is no single healthy number, because equity is a mix of how much you originally put down, how long you have been paying principal, and how the local market has moved since. A useful checkpoint is the 20% mark: below it, most US lenders require private mortgage insurance on the original loan, and above it, cash-out refinancing and home equity lines become meaningfully cheaper to arrange.
The Federal Reserve's Survey of Consumer Finances tracks median home equity among homeowning families as part of its broader wealth data, and it consistently shows housing as the largest single asset on most households' balance sheets, ahead of retirement accounts and vehicles combined. That concentration is exactly why a swing in local prices moves household net worth so much more than a swing in the stock market does for most families.
Equity share, not just the dollar figure, is what lenders read first. Two owners can both show 150,000 in equity, but one sits on a 600,000 house at 25% equity while the other sits on a 300,000 house at 50% equity — the second owner qualifies for far better borrowing terms even though the raw number is identical.
Three positions, three different pictures
A 480,000 house carries a 310,000 mortgage balance and an 8,000 second lien from a prior renovation loan. Equity comes to 162,000, which is 33.75% of the home's value, and the amount borrowable at an 85% loan-to-value ceiling is 90,000 (480,000 times 0.85, minus 310,000, minus 8,000).
A 250,000 starter home carries a 190,000 mortgage and nothing else outstanding. Equity is 60,000, or 24% of value — enough to have shed mortgage insurance but still thin enough that a 10% price drop would push the loan-to-value ratio back above 90%.
A 600,000 home carries a 420,000 first mortgage plus a 15,000 balance drawn on a home equity line taken out for a kitchen remodel. Equity is 165,000, or 27.5% of value, and the borrowable amount at 85% loan-to-value is 75,000 — noticeably less than the equity share alone would suggest, because the existing draw eats into the ceiling before any new lending is considered.
Where a static equity figure breaks down
This calculation assumes the value you enter is accurate and current. An online estimate can miss a recent kitchen gut job or a busy road that a formal appraisal would catch, and lenders will always order their own valuation before extending new credit against the number you calculated at home.
It also treats equity as instantly accessible, which it is not. Selling triggers agent commissions and closing costs that typically run 6-10% of the sale price combined, and borrowing against equity through a cash-out refinance or a home equity line adds its own fees and, for the line, a variable rate that can rise after the draw period ends.
Finally, the figure is a snapshot. A falling local market can erase equity faster than principal payments rebuild it — the 2008-2012 housing downturn pushed a substantial share of US mortgaged homes into negative equity within a few years, a reminder that the calculation needs rerunning whenever the market shifts, not just once at purchase.
Jurisdiction and timing notes
In the United States, interest on a home equity loan or line is only tax-deductible when the borrowed money is used to buy, build, or substantially improve the home securing the debt, under the rules the Tax Cuts and Jobs Act put in place; using the same funds to pay off a car loan or fund a vacation removes the deduction even though the collateral is identical.
UK homeowners generally access equity through further advances or remortgaging rather than a distinct home equity loan product, and lenders there apply their own maximum loan-to-value bands, commonly 75-90% depending on the lender and the borrower's circumstances, rather than the 85% figure common in US HELOC underwriting.
Property tax liens, unpaid contractor charges, and judgment liens all sit ahead of your claim on sale proceeds in most US states, so any unresolved charge against the title needs to go in the 'other charges' figure before you rely on the equity number for a real transaction.
Frequently asked questions
- How do you calculate home equity?
- Subtract the mortgage balance and any other liens or charges from the home's current market value. A 480,000 home with a 310,000 mortgage and an 8,000 second lien has 162,000 in equity, or 33.75% of the home's value.
- How much equity do I need to get a home equity loan?
- Most US lenders want you to keep at least 15-20% equity after the new loan is added, which is why lenders cap borrowing around 80-85% combined loan-to-value. On a 480,000 home with 318,000 already owed, that leaves roughly 90,000 available at an 85% ceiling.
- Is home equity the same as home value?
- No. Home value is what the property would sell for; home equity is what remains after subtracting everything still owed against it. A 600,000 home with 435,000 in combined debt has only 165,000 in equity, not 600,000.
- Can home equity go negative?
- Yes, when the amount owed exceeds the current market value, commonly called being underwater. It typically happens after a price decline shortly following a purchase with a small deposit, and it prevents selling without bringing cash to closing unless the lender agrees to a short sale.
- Does paying off other debt with a home equity loan still let me deduct the interest?
- Under current US federal rules, no. Interest is only deductible when the loan proceeds go toward buying, building, or substantially improving the home used as collateral; using the money to consolidate credit card debt or cover other expenses removes the deduction even though the loan is secured by the house.
- How often should I recalculate my home equity?
- Recheck it whenever you are considering a sale, a refinance, or a new home equity line, and after any sharp local market move. Because value estimates drift and mortgage balances fall only gradually, a figure more than a year old can be materially off in a fast-moving market.
Sources
- Federal Reserve — Survey of Consumer Finances — Federal Reserve triennial survey documenting housing as the largest asset class on most homeowning families' balance sheets (2022 survey data, published 2023).
- IRS Publication 936, Home Mortgage Interest Deduction — Sets out the post-2017 rule limiting home equity loan and line interest deductibility to funds used to buy, build, or substantially improve the securing home.
- Consumer Financial Protection Bureau — Home equity lines of credit — Official guidance on how HELOC draw periods, variable rates, and combined loan-to-value limits work (guidance current as of 2025).