Equity
Definition and meaning of Equity in real estate.
Equity is the financial value of a property owner's interest in their real estate, calculated as the current market value of the property minus the outstanding balance of all mortgages and liens secured against it. It represents the portion of the property that the owner truly owns free of debt.
In more detail
Equity builds up over time in two primary ways: when the homeowner makes principal payments on their mortgage, and when the market value of the home appreciates. Homeowners can leverage this accumulated value by taking out a home equity loan or a home equity line of credit, commonly known as a HELOC, to fund renovations or other major expenses.
When a property is sold, the equity is the cash amount the seller receives after paying off the remaining mortgage balance and transaction costs. Having high equity also provides a safety buffer during economic downturns, reducing the risk of the property becoming underwater.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Home equity or owner's equity |
| How to increase | Paying down mortgage principal or property appreciation |
| Borrowing options | Home equity loans and home equity lines of credit |
A homeowner owns a home valued at $300,000 with a remaining mortgage balance of $200,000, leaving them with $100,000 in equity.
Frequently asked questions
What does it mean to have negative equity?
Negative equity, also called being underwater, occurs when a property's market value drops below the outstanding balance of the mortgage loans secured against it.
Can I use my home equity to buy another property?
Yes, you can access your equity through a cash-out refinance or a home equity line of credit to use as a down payment on an investment property or a second home.
Related terms
Sources & references
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