Understanding Home Equity

Equity is a key financial and legal term, but it’s not taught in school.  Understanding the basic concept is very much in your long-term interest! (While ‘equity’ is also used as a social term, this is just about the financial and legal sense of the word.)

At heart, equity is “value owned.” If you have equity in a home, or a company, you legally own some part of its current value.  If the value of the asset goes up, that part that you own becomes more valuable.

In homes and mortgages, this idea of “the part you own” and “current value” are critical.  As the example in this video shows, the value of the home changes separately from the size of the loan.  You might own a $300K home today, and owe $200,000 — your equity is $100,000 in the current market.

If the home is valued at $600K a few years later, and your loan principal hasn’t changed (unlikely, but this is just an example), your equity would be worth $400K, and you’d owe $200K.

As the asset (property) value goes up, or the amount owed goes down, your equity grows.  Generally speaking, assets like homes tend to go up in value over time.  Equity becomes a financial tool for the owner; for example, as collateral.  Because home equity is usually one of the biggest assets people accumulate, it should be treated carefully.  Get financial advice before treating home equity like a giant piggy bank.

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