Home equity is the portion of a property's value that belongs to the homeowner and is not owed to any lender or mortgage holder. It represents the difference between the property's market value and the outstanding balance of any loans or mortgages secured against it. Home equity is an essential component of a homeowner's net worth.
To calculate home equity: Home Equity = Market Value of Property - Outstanding Mortgage Balance
For example, if the market value of a home is $300,000, and the homeowner still owes $200,000 on the mortgage, the home equity would be $100,000.
Home equity is built over time through a combination of factors, including making mortgage payments, property appreciation, and home improvements and renovations. Homeowners can leverage home equity in various ways, including borrowing against their equity using a home equity loan or home equity line of credit (HELOC), refinancing their mortgage, and selling their home in retirement.