home equity ?
value of your home less
the amount you owe on
Home equity represents the money that you have invested in your home, and consequently, the portion of your home that is yours - free and clear.
Suppose you own a home that is valued at $250,000. If you owe $100,000 on your mortgage, your equity can be calculated as:
Current value of home ($250,000) minus the amount owed on mortgage
($100,000) = Your current equity ($150,000)
Rising Real Estate Prices
Home equity is not based on what you paid for your home, but on the current value.
Notice that we said "current value of your home". If real estate prices have gone up in your area, and the value of your home has increased, your equity will have increased as well. Therefore, if the $250,000 home described above increases in value by $50,000, your equity in the home will also increase by $50,000.
Keeping an Eye on the Housing Market
Because equity is tied to current value, it is subject to market demand for homes similar to yours. The amount of equity you have in your home, therefore, can rise and fall according to conditions in the housing market. Keeping informed about your local real estate market is important if you are to take full advantage of your home as an asset.
Equity = Borrowing Power
To sum up, the equity in your home gives you the power to borrow money to finance your future.
Let's look at how this works. GO »