Equity is the difference between the market value of an asset and the amount still owed on it. In real estate, home equity grows as you pay down your mortgage and as the property value increases.
How Equity Works
Equity represents your ownership stake in an asset. For homeowners, it starts with your down payment and grows through two mechanisms: principal payments that reduce your loan balance, and market appreciation that increases your home's value.
Equity can also decrease. If property values fall (as in the 2008 housing crisis), homeowners can end up "underwater" — owing more than the home is worth, resulting in negative equity.
Why Equity Matters
Home equity is one of the primary wealth-building tools for middle-class families. It can be accessed through home equity loans, HELOCs (home equity lines of credit), or by selling the property. Equity also affects refinancing options — lenders offer better terms when you have significant equity.
Real-World Example
You bought a home for $300,000 with a $60,000 down payment (20%). After 5 years, your remaining mortgage balance is $265,000 and the home has appreciated to $350,000. Your equity: $350,000 − $265,000 = $85,000 — up from $60,000 at purchase.
Frequently Asked Questions
How do I build equity faster?
Make extra principal payments, choose a shorter loan term (15 vs 30 years), make a larger down payment, and invest in improvements that increase home value. Even $100/month extra can build equity significantly faster.
What is a home equity loan vs. HELOC?
A home equity loan gives you a lump sum at a fixed rate. A HELOC is a revolving line of credit (like a credit card) secured by your home, with a variable rate. Both use your equity as collateral.
When can I access my home equity?
Most lenders require at least 15-20% equity remaining after borrowing. So if your home is worth $400,000, you typically need to keep $80,000 in equity, meaning you could borrow against the rest.