Home equity is a key part of homeownership and a big reason why it’s considered such a great investment. But before you tap into it, make sure you understand what it is and how to build it.

Home equity gain home equity by making mortgage payments and potentially through property appreciation. However, the most significant way homeowners build home equity is by staying in their homes long enough to see a rise in value. In the real estate industry, this is known as “capitalization.”

To find out how much home equity you have, you’ll need to know your house’s current market or appraised value. Then, subtract your mortgage balance, which includes the initial down payment and monthly mortgage payments you’ve made. You can calculate this by using a calculator or by using the online Home Value Estimator from Zillow. You’ll also want to consider your debt-to-income ratio, which is calculated by subtracting the amount of money you owe on your mortgage from your income. Lenders usually set a maximum DTI ratio of 43%.

Compare Home Equity Melhores Taxas: Secure the Best Deal

Once you have the numbers, you can use them to help you decide whether a home equity loan is right for you. Keep in mind that tapping into your ownership stake can be a costly proposition, especially when interest rates are higher than those of your mortgage. Therefore, it’s important to use this funding source wisely, financing expenses that will improve your home or increase its value, rather than simply paying for unnecessary wants or needs.