What Is Equity?

Equity, especially in the context of home ownership, refers to the difference between the amount the homeowner owes on the property and what the property could sell for on the market. Over time, equity in a home typically increases as mortgage amounts go down or real estate values increase.

Obtaining equity through repayment

The most common way to obtain equity in a home is to pay down any amounts owed through a mortgage or home equity line. Frequently, homeowners carry both types of lien against their property, each of which reduces the amount of equity available. Increasing or obtaining equity requires the homeowner to reduce the amount owed on the property.

Obtaining equity through initial financing

Another way to obtain equity comes from the initial financing of the home. If a new homeowner makes a significant down payment or purchases property below the market value, the difference between the amount owed and the market value immediately provides equity.

Real estate value and equity

Finally, if the value of the property increases, equity increases. When market conditions merit, sale prices in an area increase, resulting in increased property assessments. When a home is reassessed at a higher value, the resulting difference in value turns into equity.

Using equity

Many homeowners use the equity in their home as a source of additional financial options. While equity is not liquid, meaning you cannot sell it, it does indicate value exceeding the amount owed. In this case, lenders frequently offer home equity lines or second mortgages based on available equity. This provides the homeowner with ways to leverage equity for financial needs, such as home improvements or college expenses.

For homeowners, equity provides flexibility with financial obligations. At the same time, a homeowner must know the impacts associated with using equity. Each time equity increases, the amount of profit available should the home get sold increases. Increasing equity improves a homeowner's financial standing while using equity increases the amount of debt carried against the property.