How Does Home Equity Work? Build It, Use It, Benefit From It

Owning a home isn’t just about having a place to call your own; it’s also one of the most powerful tools you have for building long-term financial security. One of the key benefits of homeownership is the opportunity to build home equity. But what exactly is home equity, and how can you use it to your advantage?

Let’s break it all down in this easy-to-follow guide that covers what home equity is, how it works, how to build it, and how to use it wisely. Whether you’re a first-time homeowner or have been in your house for years, understanding home equity is a smart financial move.

Learn About:

1. What Is Home Equity?
2. How Do You Build Home Equity?
3. How Can You Use Home Equity?
4. How Much Equity Do You Have in Your Home?
5. Home Equity vs. Refinancing
6. How MidWestOne Can Help
7. Final Thoughts

What Is Home Equity?

Home equity is the portion of your home that you truly “own.” It’s the difference between what your home is worth and what you still owe on your mortgage.

Here’s the formula:

Home’s Market Value – Outstanding Mortgage Balance = Home Equity

Example:

Let’s say your home is worth $300,000 and you still owe $200,000 on your mortgage.

Your equity = $100,000.

That $100,000 represents your ownership stake in the home—and it can become a valuable financial resource if managed properly.

How Do You Build Home Equity?

Home equity doesn’t happen overnight, but there are several ways to grow it over time:

1. Make Regular Mortgage Payments

• Each time you make a mortgage payment, you chip away at your loan balance.
• The more you pay toward the principal (not just interest), the more equity you build.

2. Home Appreciation

• As the housing market grows, your home’s value may increase.
• If your home value rises while your loan balance stays the same, your equity grows.

3. Home Improvements

• Renovations and upgrades (like kitchen remodels or energy-efficient updates) can boost your home’s value.
• Choose upgrades that provide a good return on investment.

4. Making Extra Payments

• Paying a little extra toward your mortgage principal each month —even $50 — can add up over time.
• Consider making an extra payment each year or rounding up your monthly payment.

How Can You Use Home Equity?

Once you’ve built up equity, you may be able to tap into it to access cash through two common options: a home equity loan or a home equity line of credit (HELOC).

Home Equity Loan

• A lump sum loan secured by your home.
• Repaid over a fixed term with a fixed interest rate.
• Ideal for one-time expenses like home renovations or consolidating debt.

HELOC (Home Equity Line of Credit)

• Works more like a credit card, with a revolving line of credit you can borrow from as needed.
• Variable interest rate and flexible repayment terms.
• Great for ongoing expenses like tuition, medical bills, or home upgrades.

Common Uses for Home Equity

• Home improvements
• Debt consolidation
• College tuition
• Emergency expenses
• Major life events (weddings, travel, etc.)

Read more about how you can use a home equity line of credit for home improvements: Using Home Equity Lines of Credit (HELOC) for Home Improvements

Important: Remember, your home is the collateral. If you don’t repay a home equity loan or HELOC, your lender could foreclose on your home. Use equity wisely and strategically.

How Much Equity Do You Have in Your Home?

To find out how much equity you have, you’ll need two key pieces of information:

1. Your home’s current market value
2. Your current mortgage balance

How to estimate your home’s value:

• Use online home valuation tools (like Zillow or Redfin)
• Review recent sale prices of similar homes in your neighborhood

While self-estimating the value of your home can help with your decision on using the equity you have in your home, please note that your lender will use more detailed home valuation tools which may come back with a different amount.

Use this formula to calculate the equity you have in your home:

Home Value – Mortgage Balance = Home Equity

MidWestOne Bank also offers resources to help you estimate your home equity and explore your borrowing options. Learn more about our home equity loans and services.

Is Refinancing the Same as Using Equity?

Not quite! Here’s a quick comparison:

Home Equity Loan/HELOC

• You keep your original mortgage
• You borrow against the equity you’ve built

Cash-Out Refinance

• You replace your existing mortgage with a new one
• You borrow more than you owe and receive the difference in cash

When to Consider Refinancing

• Interest rates have dropped
• You want to lower your monthly payment
• You want to cash out a large portion of equity

Both options have pros and cons. Speaking with a lending expert can help you decide which one is right for you.

Find Your Local Lending Expert

How MidWestOne Bank Can Help

At MidWestOne Bank, we’re here to help you understand, grow, and use your home equity responsibly. Whether you’re thinking about home improvements, paying for college, or just want to explore your options, our team is ready to walk you through it.

We offer:

• Home Equity Loans with competitive rates
• HELOCs for flexible borrowing
• Mortgage refinancing options tailored to your needs
• Friendly experts who know your local market and want to help you succeed

Final Thoughts: Your Home Is a Financial Asset

Home equity is one of the biggest benefits of homeownership. When used wisely, it can provide access to funds for important life events, home upgrades, or debt management. The key is understanding how equity works and how to use it strategically.

Whether you’re just getting started or looking to make the most of your home’s value, MidWestOne Bank is here to help.

Ready to find out how much home equity you have?

Talk to your local banker about getting started!