Home Equity
The portion of a home's value that the owner actually owns outright, equal to market value minus any outstanding mortgage balance.
What is Home Equity?
Home equity is the difference between a property's current market value and the total outstanding mortgage debt against it. It represents the homeowner's ownership stake in the property. Equity builds through two mechanisms: principal paydown (each mortgage payment reduces the loan balance) and home price appreciation (rising property values increase equity). Home equity is typically a household's largest asset. It can be accessed through cash-out refinancing, a home equity loan (fixed-rate second mortgage), or a HELOC (variable-rate revolving line). Tapping home equity for consumption carries risks — if home values fall, a homeowner can become 'underwater' (owing more than the home is worth), and using the home as collateral risks foreclosure if payments cannot be made.
Example
A homeowner bought a house for $400,000 in 2018 with a 20% down payment ($80,000) and a $320,000 mortgage. By 2024, the mortgage balance had been paid down to $280,000 and the home appreciated to $550,000. Home equity = $550,000 - $280,000 = $270,000. The homeowner's equity tripled from the original $80,000 down payment — reflecting both principal paydown and significant price appreciation.