Home Equity
BeginnerHome equity is the part of a home's value that the owner owns outright. It equals the current market value of the home minus the amount still owed on any mortgage or other loans secured against it.
When you buy a home with a mortgage, your equity starts with your down payment. It then grows in two ways: as you repay the mortgage principal, and as the home's value rises.
For example, if your home is worth 350,000 and you owe 210,000 on your mortgage, your home equity is 140,000. If the home rises in value to 380,000 and you repay another 10,000 of the loan, your equity grows to 180,000.
Equity can also fall. If house prices drop, equity shrinks, and if the home's value falls below the amount owed, the owner has negative equity, which can make it hard to sell or remortgage.
Homeowners can borrow against their equity through products such as a home equity loan or home equity line of credit. This can provide money for renovations or other needs, but it increases the debt secured on the home, so failing to repay could put the home at risk. For many households, home equity is their largest single source of wealth.
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