Home Equity
What Is Home Equity?
Home equity is the difference between a home’s current market value and the remaining balance on the mortgage loan used to purchase the property.
It represents the portion of the property that the homeowner truly owns.
Why It Matters
Home equity can be a valuable financial asset. As homeowners pay down their mortgage and property values increase, equity grows and can contribute to overall net worth.
Home equity may also be used to access financing through loans such as home equity loans or home equity lines of credit.
How Home Equity Works
Home equity grows in two primary ways:
- paying down the mortgage balance
- increases in property value
The formula is generally:
Home Equity = Property Value − Mortgage Balance
Equity can sometimes be borrowed against or used when selling the home.
Example
If a home is worth $400,000 and the remaining mortgage balance is $250,000, the homeowner has $150,000 in home equity.
Home Equity vs Mortgage Balance
- Home equity represents the ownership portion of the home.
- Mortgage balance represents the remaining debt owed to the lender.
FAQs About Home Equity
How can homeowners increase equity?
By paying down mortgage debt or benefiting from rising property values.
Can home equity be borrowed against?
Yes. Some homeowners use home equity loans or lines of credit.
Does selling a home convert equity to cash?
Yes. Equity may become cash after the home is sold and debts are paid.
Related Terms
