Home equity
The part of a home’s value the owner truly owns: its current market value minus every loan secured by it.
What it means
Home equity grows in two ways: paying down the mortgage principal and increases in the home’s market value. It shrinks if values fall or if the owner borrows more against the home. Equity can turn negative when the home is worth less than what is owed, often called being underwater.
Equity is often a household’s largest asset and counts toward net worth. It is not liquid, though: turning it into cash means selling, refinancing or borrowing through a home equity loan, HELOC or reverse mortgage, each with costs and risks.
Formula
Home equity = market value − total mortgage balances
- market value = what the home would likely sell for
- total mortgage balances = all loans secured by the home
Example
For example, if a home is worth $400,000 and the owner owes $250,000, equity is $150,000, or 37.5% of the home’s value.
How it’s used
- Calculating net worth
- Determining how much can be borrowed against a home
- Estimating proceeds from a sale
See it in the data: The median home price since 1980 →
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Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.