The amount of a home’s value that the owner actually owns, calculated by taking the final sale price of the home and subtracting the amount the owner still owes on the mortgage loan. In practical terms, the equity is the amount of money you would get from the sale of a home after paying off the bank. If you borrow $400,000 to buy a $500,000 house, your equity the day you move in is $100,000 and it increases as your mortgage payments reduce what you owe the bank, assuming the market value remains constant.
Another reason your equity can increase is if the value of the property increases. If your $500,000 home increases in value to $600,000, your equity with a $400,000 loan is $200,000. On the other hand, the amount of equity you have in a home decreases if you have a negative-amortizing loan (where your mortgage payment is too low to cover even the interest, and so your loan gets larger over time) or if the home value decreases. In a steeply declining market, the same $500,000 home can be worth only $300,000. If you owe the bank $400,000, you have negative equity because you’re underwater by $100,000. Learn how to calculate your home equity or how to increase your home’s value.