Over time, equity can turn your mortgage debt into a sizable amount of equity. You can use it to get a line of credit, a home equity loan, or refinance. Plus, if you're considering selling your home, the equity you create can be used to buy your next home.

But before you put this nest egg to use, you should know exactly what equity is in today's record high home prices. Here's what the experts have to say about home equity.

What is home equity?

When you initially get a mortgage, most of the equity in your home belongs to the bank. This can be anywhere from 80% to 95%, depending on how much you put down. Each time you make a mortgage payment, the home equity portion (the amount you own outright) increases - minus any outstanding mortgages or other encumbrances.

"Simply put, equity is the difference between the current market value of the property you own and the amount still owed on the mortgage," says Adie Kriegstein, a real estate broker and founder of Compass' New York City experience team.

Every mortgage payment you make adds to your equity. However, if you decide to apply your equity to a line of credit or home equity loan, your equity will decrease.

Building your equity egg takes time. And, depending on market conditions, your equity can go up or down dramatically. Today, many homeowners are sitting on record high equity as a result of a decade-long boom in low interest rates through 2022.

"As home prices rise, the value of your home equity will increase as long as your debt stays the same," said Jill Fopanio, CEO of O'Brien Wealth Partners.

Home equity can be a seller's most valuable asset.

When you sell your home, you build equity that can be used to pay off the remaining mortgage balance and other debts, potentially leaving you with a profit.

Or you may decide to use the equity as a down payment on your next home, or to fund other investments or expenses. If you have a lot of equity, you can make a larger down payment, which will allow you to qualify for a lower interest rate.

If you're considering selling your home, this sounds like a win-win for everyone. But before you start counting your cash, you should determine how much equity you have and whether it makes sense to put your home on the market.

"By knowing their home equity, sellers can set a realistic asking price for their property and avoid pricing it too high or too low," Kriegstein says.

How much home equity do you have?

Whether you put your home on the market or leave it where it is, it's critical to know how your home equity and home value is measured.

"This can help homeowners make informed decisions about potential home improvements or financial decisions, such as taking out a home equity loan," says Kriegstein.

In short: Home values affect your equity, increasing when property values go up and decreasing when property values go down.

Typically, the value of a home appreciates 3% per year. So if you've owned your home for a while, you've probably built up some equity and may not even realize how much equity you have until you do a little homework.

"While the best valuation is what buyers are willing to pay, more viable methods include researching the value of your home through online sites, checking out comparable sales in your area, or ordering an appraisal," Fopagnol said.

Once you've determined the value of your home, subtract any debt associated with the house, such as the first or second mortgage balance and home equity loan. The remainder is your equity.

So let's say you bought your house for $200,000 and a few years later, your loan balance is $160,000. And in that time, the value of your home jumps to $250,000. With this simplified example, your equity is now $90,000.

How much equity should you have before you sell your home?

If you want to take advantage of the equity in your home, it's critical to consider a few key financial factors. One is whether you have enough equity to sell your home. There is no one-size-fits-all amount, but there are some general guidelines.

"A common rule of thumb is that you should have at least 20 percent equity in your home before you consider selling it," says Kligstein." If you have less than 20 percent equity, you may need to pay private mortgage insurance, which could significantly increase your monthly mortgage payments.

Another variable is current market conditions.

"If the housing market is strong and demand for your home is high, you may be able to sell your home with less equity than if the market is weak and there are fewer buyers," Kriegstein adds.

Even with these guidelines in place, it's wise to talk to a trusted real estate agent and financial planner to get a clear picture of your options and decide whether to sell or stay put.