What is Home Equity?

Home equity is a notional amount that a person owns at any given time, which is computed as the market value of a home minus any remaining principal repayments on a loan.

Home equity is an asset on a person’s balance sheet, and can be used as as leverage for additional loans or lines of credit. A person’s home equity is the amount in their home which is “paid off.” It can be computed by taking the fair market value of a home and subtracting the amount of principal, if any, that still needs to be repaid on a mortgage loan.

This does not include interest payments, which are basically the bank’s fee for buying the house for you and allowing you to pay them back. Ownership of the portion of the principal due that you have paid off are effectively transferred over to you as you pay.

People sometimes use the equity in their home to get a home equity line of credit (HELOC), a reverse mortgage, or another type of liquidity that basically subjects their home to risk of forfeiture.

Gradually paying off the principal on a house is known as “building up equity” in a home.