Definition of Home Equity

What is the definition of the term "home equity"? What is meant by "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

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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.

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