Home Equity

"Home equity" is the total "value" of the money that you have built up in your home.

Home equity is calculated like this:

Current Market Value of Home - Outstanding Mortgage(s) = Home Equity

Let's look at a few examples of how to calculate "home equity":

Example 1:

A young couple owns a house that has a current market value of $275,000. The outstanding mortgage on the property is currently $200,000.

The couple currently has $75,000 in equity in the home ($275,000 - $200,000).

Example 2:

A family of four owns a home that is currently valued at $500,000.

There are two mortgages on the home - a primary mortgage with a balance of $74,000, and a second mortgage with a balance of $125,000. The family decided to take out a second mortgage to perform some extensive renovations on the home.

In this case, the total equity in the home is:

$500,000 - $74,000 - $125,000 = $301,000

--

During the real estate boom of a few years ago, many people took out HELOC (Home Equity Line of Credit) loans. These loans were secured by the equity that had built up in homes thanks to a very robust market.

When the market crashed, many people were left with homes that were worth less than what they owed.