Legal Definitions - home equity

Home equity refers to the portion of your home's value that you truly own. It is calculated by taking your property's current market value and subtracting any outstanding debts or liens secured by the property, such as a mortgage. As you pay down your mortgage or as your property's market value increases, your home equity generally grows.

• Scenario: Building Equity Through Mortgage Payments

  Imagine Sarah bought a house for $300,000 with a $60,000 down payment, taking out a $240,000 mortgage. Initially, her home equity was $60,000 (the down payment). Five years later, she has consistently made her mortgage payments, reducing her outstanding loan balance to $200,000. If the market value of her home has remained stable at $300,000, her home equity has now grown to $100,000 ($300,000 market value - $200,000 outstanding mortgage).

  This example illustrates how consistently paying down a mortgage directly increases home equity, even if the property's market value doesn't change.

• Scenario: Equity Growth Due to Market Appreciation

  Consider David, who purchased his home for $400,000 with a $300,000 mortgage. After several years, he still owes $250,000 on his mortgage. However, due to a strong local real estate market, his home is now appraised at $550,000. David's home equity would be $300,000 ($550,000 current market value - $250,000 outstanding mortgage).

  This demonstrates how an increase in the property's market value, independent of mortgage payments, can significantly boost a homeowner's equity.

• Scenario: Assessing Equity for Financial Decisions

  Maria is considering selling her home, which she believes is worth $700,000. She has a remaining mortgage balance of $150,000 and no other debts against the property. To understand her potential profit or how much she might have available for a down payment on a new home, she calculates her home equity as $550,000 ($700,000 estimated market value - $150,000 outstanding mortgage).

  This example shows how home equity is a crucial calculation when a homeowner is planning to sell or leverage their property, as it represents the net financial interest they have in the asset.