What is home equity?

Home equity is defined as the difference between the market value of a home and the amount owed on the mortgage. This concept reflects the owner’s financial interest in the property. For example, if a home is worth $300,000 and the mortgage balance is $200,000, the homeowner has $100,000 in equity.

Understanding home equity is crucial for homeowners, as it can be used for various financial purposes, including obtaining home equity loans or lines of credit, funding renovations, or leveraging it for other investments. Changes in market value, as well as repayments on the mortgage, directly impact the equity that a homeowner has in their property.

The other choices do not encapsulate the full and precise meaning of home equity. The initial cost of a home refers to the purchase price, which does not account for mortgage debt or market fluctuations. Similarly, the amount owed on a mortgage alone does not indicate value or ownership stake, and real estate appreciation is a separate concept that describes the increase in property value over time but does not specifically define equity.