What Does “Equity Rich” Mean?

Quick Answer

If a homeowner is “equity rich,” it means they have at least 50% equity in their home—or they owe less than half their home’s value on their mortgage. Being equity rich is a great position to be in because building home equity is a key way homeowners can grow wealth over time.

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Being equity rich means having at least 50% equity in your home, or owning more than half your home's market value outright. That's a positive financial position to be in for a number of reasons. It means you can feel relatively safe and sheltered from the risk of going underwater on your mortgage, for example. It also means you have access to a flexible source of financing, because you can borrow against your home equity. Last, it means you can more reliably sell your home for a profit.

Here's more on what it means to be equity rich and how you can best use your home equity—plus tips on increasing equity in your home.

What Is Home Equity?

Home equity is the portion of your home that you own free and clear. It's defined as the difference between the market value of your home and the balance on your mortgage. Home equity is considered an asset that increases your net worth, so building equity is a key part of building wealth over time. The more equity you have in your home, the better.

To calculate how much you have in equity, subtract your mortgage balance from your home's market value. For example, if your home is worth $300,000 and you owe $250,000 on your mortgage, then you have $50,000 in equity.

You'll often see equity expressed as a percentage. To find your home equity percentage, divide your current equity by your home's market balance. In the example above, that's $50,000 divided by $300,000, which comes out to about 17% equity.

What Does It Mean to Be Equity Rich?

Being equity rich means, broadly, having at least 50% equity in your home. For example, if a home's market value is $400,000 and there's $180,000 on the mortgage, then there's $220,000 in equity. The homeowner would be considered equity rich. Becoming equity rich is desirable for a number of reasons. When you have high home equity, you can use it to finance a number of goals, such as improving your home or consolidating debt, or continue to build equity to eventually sell your home for a significant profit.

How to Use Home Equity

You don't have to use your home equity at all. Instead, you can continue to pay down your mortgage until you own the house free and clear or sell it and pocket the cash (or use it to buy another property). But, if you have purchases or projects you need to finance because you don't have the money in savings, home equity can provide a low-cost way to borrow.

To tap into home equity, consider a home equity loan, which is a type of second mortgage with fixed interest that you pay back each month. You can also consider a home equity line of credit (HELOC), a type of revolving credit which works like a credit card. It allows you to finance purchases up to a credit limit and then repay them flexibly over time. A cash-out refinance is another way to borrow using your equity. You take out a new mortgage for more than what you currently owe, and receive the cash that's left after paying off your first mortgage.

You can tap into home equity to finance a broad range of goals. But before you do, make sure you consider your full financial picture. Borrowing against your equity means using your home as collateral. That carries substantial risk. Always carefully review the loan's terms and be sure you're confident in your ability to repay the loan.

Best Ways to Use Home Equity

The best ways to use home equity are often those that improve your finances overall. These ways include:

How to Increase Home Equity

There are two major ways your home's equity can increase. First, the mortgage principal balance goes down—which happens as you make your mortgage payments. Second, the value of your home goes up, which can happen organically over time or through improvements you make.

Here's how your home equity can increase:

  • Make mortgage payments each month. Paying your mortgage down each month will help you build equity over time. As the balance you owe reduces, the amount of equity in your home increases.
  • Make extra payments. Making additional payments above the monthly amount due on your mortgage helps you pay off your mortgage sooner—and increase equity faster. That said, always consider the opportunity cost of putting extra money into your mortgage. Could the extra money you're putting into your mortgage go further funneled into retirement savings or high-interest debt repayment, for example?
  • Wait for property values to increase. Home values tend to rise over time, so you may see a rise in home equity simply by holding on to your property while time passes. Of course, economic cycles of inflation and recession, plus factors in your local market, play a big part in how your home's value will fluctuate in a given period.
  • Make home improvements. Investing in renovations and home repairs can help increase equity. Be sure to consider the return on investment (ROI) of a given project when planning improvements. Home repairs with a higher ROI (such as landscaping or minor kitchen and bathroom remodels) can be a better investment than those with a low ROI (such as upscale kitchen and bathroom remodels or extensive additions) if your goal is to get the most bang for your buck.

Factor Equity Into Your Full Financial Picture

When you're equity rich, you have the luxury of added financial stability and access to low-interest borrowing. You can leverage equity to further improve your financial picture by using it to consolidate debt or borrowing against it to finance high-ROI home improvements.

If you're considering tapping into your home equity to fund a goal, it may be a good idea to consult with a financial advisor. They can help you understand how taking on a loan would impact your financial picture, which can help you avoid overextending yourself financially. They can also help you consider how tapping into equity fits into your long-term financial goals, such as saving for retirement.