What is Home Equity (And How Can I Use It?)

Posted January 11, 2021

Home equity is one of those terms you hear a lot. You may have a general sense that it’s a good thing that’s tied to homeownership, but not know the nuts and bolts of it. No fear: here’s an explain-it-to-me-like-I’m-12 look at home equity.

DEFINITION

Home equity refers to your ownership stake in your home. It’s calculated as the home’s current market value less what you owe on the property via your mortgage and any liens.

For example: If your home’s market value is $500,000 and there’s $240,000 remaining on your mortgage, your home equity is $260,000 or 52% of its value.

HOW HOME EQUITY CHANGES OVER TIME

Home equity changes over time. Examples of how this works are:

You gain equity as you make mortgage payments; each payment reduces your home loan a little bit;
You gain equity as the value of your property increases due to home improvements or changes in the real estate market;

It’s also possible to lose equity, say, if housing values drop or if the home itself loses value due to disrepair or bad renovation choices .

If that $500,000 home we talked about earlier now has a market value of $450,000 and the same $240,000 mortgage, your home equity is now $210,000 or 46.6% of the property’s value.

Fortunately, home values generally tend to appreciate (increase) over time.

HOW TO USE YOUR EQUITY

Home equity can be used as collateral in a home equity loan or a home equity line of credit (HELOC), also known as a second mortgage.

Another way to use your home equity is to borrow additional funds at mortgage renewal time, or by refinancing your existing mortgage.

Canadians over age 55 can leverage their home equity with a reverse mortgage .

Because these types of loans are secured against home equity, they are offered at interest rates well below unsecured loans such as credit cards or personal lines of credit. Many Canadians leverage their home equity to boost their overall financial health. Examples of this include:

Paying off high-interest consumer debt;
Funding university, college or a training program;
Paying for home improvements;
Freeing up money for a down payment ona second home or other investment.

Although you’re adding to what you owe on your home, it’s money well spent because, to use the examples above, you’d either be saving money outright (elimination of high-interest debt), be boosting future income (education and training) or building home equity in the mid- to longer term (the other two examples).