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Loan Basics

Home Equity

Home equity is the part of your home you actually own: its current value minus what you still owe on the mortgage. If your home is worth $400,000 and you owe $300,000, you have $100,000 in equity. It grows as you pay down the loan and as the home's value rises, and you can sometimes borrow against it.

Equity is the wealth-building part of owning a home. It starts with your down payment and grows two ways: every payment chips a little off your loan balance, and over the long run, home values tend to rise. Both move the gap between what the home is worth and what you owe in your favor.

Once you’ve built enough, equity isn’t just a number on paper. You may be able to tap it through a cash-out refinance or a home equity line for things like renovations or paying off higher-interest debt. That borrows against your home, though, so it’s a decision to make carefully, and I’ll walk through the tradeoffs honestly.

Related terms

LTV (Loan-to-Value Ratio)

LTV, or loan-to-value ratio, compares your loan amount to the home's value, shown as a percentage. If you borrow $360,000 on a $400,000 home, your LTV is 90%. A lower LTV means more equity, which can affect your rate, your mortgage insurance, and the programs you may qualify for.

Principal

Principal is the amount you actually borrow, before any interest. Each mortgage payment splits between principal and interest, and early on, most of it goes to interest. As the years pass, more of each payment chips away at the principal, which is how you slowly build equity in your home.

Down Payment

A down payment is the part of the purchase price you pay upfront in cash, with the loan covering the rest. It's shown as a percentage, so 5% down on a $400,000 home is $20,000. A bigger down payment lowers your loan amount and can reduce or remove mortgage insurance. Some programs allow as little as zero down.

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Last updated: June 13, 2026

This definition is educational and isn't an offer to lend or financial advice. Rates, programs, and guidelines may change without notice. All loans are subject to credit and property approval.

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