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Home equity is the homeowner's Ownership equity in their property, calculated as the difference between the property's current market value and the total outstanding balances of all loans secured by the home.
In the United States, it is a major source of wealth accumulation with the majority of middle class wealth being held in home equity which totals over $35 trillion overall.
Homeowners acquire equity in their home from two sources. They purchase equity with their down payment and the principal portion of any payments they make against their mortgage. Definitionally, this results in the immediate creation of home equity in the amount of the down payment at the time of purchase with equity increasing with each payment (in cases of standard amortizing loans). The property's Ownership equity increases as the debtor makes payments against the mortgage loan balance.
Equity also increases as the property value appreciates as the value of the property increases while the debt remains unchanged. Conversely, home equity may decrease on a property should valuations decline. In extreme cases, this can result in negative equity, often referred to as mortgages which are "underwater" or "upside down". In 2012, approximately 20% of mortgage holders were underwater; negative equity was most concentrated in Nevada where 61% of mortgages were upside down. Arizona (48%), Florida (44%), Michigan (35%), and Georgia (33%) also all showed a high percentage of homeowners with negative equity. Negative equity greatly increases the risk of foreclosure and default since a home sale will no longer fully cover the debt.
Home equity is Market liquidity. As Paper wealth and not cash in hand, it cannot be readily spent or used for purchases in its current form. An owner must typically sell the property or utilize it as collateral through home equity release products to convert equity into liquid funds.
Since the mid-1900s, home equity has been the primary strategy for the American middle class to build household wealth. In most Americans' portfolios, their home is their largest asset. According to the 2016 Survey of Consumer Finances, home equity contained in households' primary residence accounted for approximately a quarter of their overall assets.
Rise in home values and its use as a "forced savings plan" contribute to record wealth disparity between homeowners and non-owners with homeownership viewed as a key part of the American Dream separating the middle class from the poor. Home equity represents between 50% and 70% of net wealth for Americans in the three middle income quintiles. In the aggregate, home equity accounts for 43% of net worth for the median household. At the turn of the century, home equity's median share of net wealth among households with positive net worth was 27.2% with an average of 35.3%.
The median net worth among homeowners was approximately $400,000 in 2024 compared to $10,000 for renters. This gap has widened over time, nearly doubling (growing by ~70%) between 1989 and 2022. Retention of net worth held in home equity has historically enabled intergenerational wealth transfer and played a key role in intergenerational wealth accumulation. Broad homeownership enabled by the GI Bill following World War II allowed the accumulation of home equity which developed the middle class and enabled generational wealth transfers.
Home equity's function as forced savings over the life cycle, results in older homeowners often have substantial home equity, whereas renters tend to have very low wealth in later life, with the gap peaking by retirement for those who own homes. Home equity release products can help retirees access home equity creating additional income and improve retirement security.
Property buyers typically look to purchase properties that will grow in value, causing the equity in the property to increase, thus providing a return on their investment when the property is sold. Pessimistic buyers typically opt for higher leverage through smaller Down payment to limit financial exposure when household needs dictate property size; this pattern is especially pronounced in markets with lower default costs or during anticipated housing downturns.
In New Zealand, the rate of homeownership has been rapidly declining with 67% of households owning homes in 2024, down from 74% in 1991, with a drop to 48% expected by 2048.
Home equity management refers to the process of tapping equity via , at favorable, and often tax-favored, , to invest otherwise Market liquidity equity in a target that offers higher returns. Home equity may serve as collateral for a home equity loan or home equity line of credit. Many home equity plans set a fixed period during which the homeowner can borrow money, such as ten years. At the end of this “draw period,” the borrower may be allowed to renew the credit line. If the plan does not allow renewals, the borrower will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, ten years.
Meanwhile, in countries such as the United Kingdom, a set of Equity release allow homeowners to unlock equity while remaining in the home regulated by the Financial Conduct Authority. Lifetime mortgages accrue interest over time but require no monthly payments; the loan is repaid when the home is sold.
Equity release products differ substantially in structure, risk, and tax treatment and different countries have different regulatory regimes for various product types with varying levels of consumer protection. Some have suggested access to home equity release products ultimately harms household welfare by eroding savings commitment with one study suggesting that the welfare losses from weakened discipline outweighing the gains from flexibility by a factor of 1.7 and driving a 2.5 percentage point drop in the personal saving rate.
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