Here's What Happens When You Have No Equity in Your Home

U.S. home values are up on a national scale. And because of that, property owners have a collective $30 trillion in home equity, according to the St. Louis Federal Reserve. That's equity they can tap for a variety of purposes.

But what if you don't have any equity in your home? If you put $0 down on your mortgage, which is possible with certain types of home loans, that may be the case.

If you don't have equity in your home, borrowing against your home won't be possible. So if you're looking to finance a renovation, you may need to turn to a personal loan, because a home equity loan or HELOC (home equity line of credit) will be off the table.

But that's not the only consequence of having no equity in your home. So it's important to understand the ramifications of not having equity.

When your mortgage becomes tough to manage

Many people sign mortgages and assume they'll be able to keep up with their payments. But sometimes, circumstances can change. If you don't have equity in your home and you fall behind on those payments, your mortgage lender might eventually force the sale of your home via foreclosure.

Now to be clear, if you stop making your mortgage payments, you could end up getting foreclosed on even if you have plenty of equity in your home. The only difference is that there would be no need for things to get to that point.

When you have equity in your home, it means your home is worth more than your remaining mortgage balance. So if you owe $150,000 to your lender and your home's market value is $250,000, it means you have $100,000 in equity. In that case, there would be no need for foreclosure -- a process that could seriously wreck your credit score -- because you'd be able to sell your home for a high enough price to pay off your lender and walk away clean.

But let's say your home is worth $300,000 and you owe $310,000. In that case, you have no equity and you're underwater on your mortgage -- meaning, your loan value is higher than the market value of your home. That's not a good spot to be in.

You may end up in a situation where your home is worth $350,000 and you owe $350,000 on your mortgage. In that case, you have no equity, but you're also not underwater on your mortgage. But because there are costs to selling a home the conventional way, that may not be an option in this sort of scenario.

How to build home equity

There are certain mortgage programs, like VA loans, that allow you to purchase a home with no money down. But if you want to build equity in your home, make a down payment. If you can't swing 20% down, put down something to at least get started.

You can also build equity in your home by making extra mortgage payments to whittle down your loan's principal, and by improving your home to raise its value. Granted, these things will require you to spend money, but they also serve the purpose of increasing your equity.

Having equity in a home gives you more options for borrowing money and being able to walk away when your housing costs rise beyond your comfort level. So it pays to try to build equity in your home as best as you can.