Equity is the value of a property minus the amount owed on the property from a mortgage or other loans. The amount of equity is calculated by subtracting the mortgage, second loans, or other obligations on the property from the current fair market value.
Home equity can increase based on paying down the mortgage and any other loans through monthly payments. Depending on the type of mortgage, the payment is divided between principal and interest. The principal amount pays down the amount of the loan. This, in turn, increases the equity in the property. A lump sum payment against the principal can also increase equity.
Home equity also increases with an increase in the property’s value, which is called appreciation. As the value of the home increases with the mortgage amount remaining the same, the equity would increase in step with the appreciation amount. Of course, there is no guarantee that the property’s value will increase over time. It could also decrease.
Equity can be used as leverage for a home equity line of credit, a home equity loan, or a cash-out refinance. These are three ways to tap equity for other financial needs or investments.