An equity account holds the ownership stake you have in an asset, usually your home

An equity account is a financial account that tracks how much of an asset you actually own outright, as opposed to how much you still owe on it. The most common example is a home: if you bought a house for $300,000 and still owe $200,000 on the mortgage, your equity in that house is $100,000. That $100,000 is yours; the bank's claim is only the $200,000 debt.

Equity accounts work differently depending on what asset they're tied to. With a home, your equity grows as you pay down the mortgage and as the property value rises. With a brokerage account, equity refers to the total value of stocks, bonds, or other investments you own. With a business, equity is what remains after subtracting all debts from the total value. The principle is the same across all of them: equity is ownership, expressed as a dollar amount.

Banks and lenders track equity because it matters to them. If you want to borrow against your home—through a home equity line of credit or a cash-out refinance—the lender needs to know how much equity you have. If you default on a loan, the lender can seize the asset and sell it; your equity is what's left after they recover what you owe them.

Key Takeaways

  • Equity is the portion of an asset you own outright; it equals the asset's value minus what you still owe on it.
  • Home equity grows as you pay down your mortgage and as your property value increases, and you can borrow against it.
  • Investment accounts track equity as the total market value of the securities you hold.
  • Lenders use your equity to decide whether to lend you money and how much risk they're taking on.
  • You can access your home equity through a home equity line of credit (HELOC), a second mortgage, or a cash-out refinance.

How equity builds in a home

Every mortgage payment you make reduces what you owe and increases your equity. If you pay $1,500 a month and $1,200 of that goes toward principal (the rest covers interest and insurance), your equity grows by $1,200 that month. Over 30 years, this adds up: by the time you've paid off the mortgage, your equity is 100 percent of the home's value.

But equity also grows when your home's market value rises. If your house was worth $300,000 when you bought it and is now worth $350,000, your equity increased by $50,000 even if you haven't made any extra payments. This is called appreciation. The reverse is also true: if the market drops and your home is now worth $280,000, your equity shrinks by $20,000, even though you've been paying the mortgage faithfully.

The speed at which equity builds depends on your mortgage terms, your down payment, and local property values. A 15-year mortgage builds equity faster than a 30-year one because more of each payment goes to principal. A larger down payment means you start with more equity on day one. And in a rising market, you build equity passively just by owning the home.

Equity in investment and brokerage accounts

In a brokerage or investment account, equity refers to the total value of everything you own in that account. If you have $10,000 in stocks and $5,000 in bonds, your equity is $15,000. If the market rises and those holdings are now worth $18,000, your equity has grown to $18,000. If the market falls to $12,000, your equity is now $12,000.

This is different from home equity because there's no debt involved—you own the securities outright (unless you're using margin, which means borrowing from your broker to buy more). Your equity is simply what your investments are worth on any given day. Some brokers let you borrow against your equity through a margin loan, but that's optional and requires a separate agreement.

Investment equity fluctuates daily based on market prices. Home equity can also fluctuate, but you don't see the changes as often because homes aren't priced every day. Both types of equity represent real ownership, but investment equity is more liquid—you can sell it and access the cash within days, whereas selling a home takes weeks or months.

How to find out how much home equity you have

Your mortgage lender can tell you your current loan balance; you can find it on your monthly statement or by logging into your online account. Your home's estimated value is harder to pin down because it depends on the market. You can get a rough estimate from online tools like Zillow or Redfin, but these are not official appraisals and can be off by thousands of dollars.

For a more accurate number, you can order a professional appraisal, which typically costs $300 to $500. An appraiser will inspect your home and compare it to recent sales of similar homes in your area. If you're planning to borrow against your equity, the lender will order an appraisal anyway, so you may not need to pay for one yourself.

The math is simple once you have both numbers: home value minus mortgage balance equals your equity. If your home is worth $400,000 and you owe $250,000, your equity is $150,000. Some of that equity is "locked in"—you can't access it without selling the home or borrowing against it—but it's still yours.

Ways to borrow against your home equity

If you need cash, you can tap your home equity through three main routes. A home equity line of credit (HELOC) works like a credit card: the lender gives you access to a credit line (say, $50,000) and you draw from it as needed, paying interest only on what you use. A home equity loan is a lump sum: you borrow a fixed amount (say, $50,000) and repay it over a set term, usually 5 to 15 years. A cash-out refinance replaces your existing mortgage with a new, larger one; you pocket the difference in cash.

All three methods use your home as collateral, which means if you stop paying, the lender can foreclose. Interest rates on equity borrowing are usually lower than credit card rates because the lender's risk is lower—they can seize the home if you default. But this also means the stakes are higher: you're not just risking your credit, you're risking your home.

Lenders have limits on how much equity you can borrow. Most will lend up to 80 or 90 percent of your home's value, minus what you still owe on the first mortgage. If your home is worth $400,000 and you owe $250,000, and the lender will go up to 80 percent, you can borrow up to $320,000 minus $250,000, or $70,000. The exact amount depends on your credit score, income, and the lender's policies.

What happens to equity when you sell your home

When you sell, the sale price minus the mortgage payoff minus closing costs (realtor fees, title insurance, inspections, and other charges) equals what you walk away with. Closing costs typically run 2 to 5 percent of the sale price, so they're substantial. If you sell a $400,000 home, owe $250,000 on the mortgage, and closing costs are $12,000, you receive $400,000 minus $250,000 minus $12,000, or $138,000.

That $138,000 is your equity converted to cash. You can use it however you want: buy another home, pay off debt, invest it, or spend it. There's no tax on the proceeds if you're selling your primary residence and meet certain conditions (you've lived there at least two of the last five years, and you haven't excluded gains on another home sale in the past two years). If you're selling an investment property or a second home, capital gains tax may apply.

If you owe more on the mortgage than the home is worth—called being "underwater"—you have negative equity. Selling in this situation means you have to bring cash to closing to cover the shortfall, or you need the lender's permission to do a short sale, where the lender accepts less than what's owed.

Equity in business and other assets

Business owners track equity as the value of the company minus all its debts. If a business is worth $500,000 and has $200,000 in loans and liabilities, the owner's equity is $300,000. This equity can be split among multiple owners (shareholders), and each owner's stake is tracked separately. Equity is what an owner would receive if the business were sold and all debts paid off.

Equity also applies to vehicles, though it works the same way as with homes: the car's market value minus what you owe on the loan. If you bought a car for $30,000 and still owe $18,000, your equity is $12,000. As you pay down the loan and the car depreciates, your equity changes. Unlike homes, most cars depreciate, so your equity typically shrinks over time even as you pay down the loan.

Frequently Asked Questions

Can I lose my equity if I stop paying my mortgage?

Yes. If you default on your mortgage, the lender can foreclose and sell the home. After paying off the remaining loan balance and costs, any money left goes to you—but if the home sells for less than you owe, you may owe the difference. Foreclosure also destroys your credit for years.

Is home equity the same as net worth?

No. Net worth is everything you own (home, car, investments, cash) minus everything you owe (mortgage, car loan, credit cards, student loans). Home equity is just one piece of that calculation. You can have high home equity but low net worth if you have large debts elsewhere.

Do I have to pay taxes on my home equity?

You don't pay taxes on equity itself, but you may pay capital gains tax when you sell if the home has appreciated significantly and you don't meet the primary residence exemption. Borrowing against equity through a HELOC or home equity loan is not taxable income, though the interest may be deductible if you use the funds for home improvements.

What's the difference between equity and down payment?

Your down payment is the cash you put toward the purchase price when you buy. Your equity is what you own after accounting for the loan. If you put down 20 percent on a $300,000 home, your down payment is $60,000 and your starting equity is $60,000. As you pay the mortgage, equity grows; the down payment stays fixed.

Can I borrow against my equity if I have bad credit?

It's harder but possible. Most lenders require a credit score of at least 620 for a HELOC or home equity loan, though some go lower. Bad credit usually means higher interest rates and stricter terms. If you can't may have access to through a traditional lender, some credit unions and portfolio lenders (who keep loans in-house) may work with you, but expect to pay more.