The difference between your home's current market value and the amount you still owe on your mortgage. If your home is worth $400,000 and you owe $280,000, you have $120,000 in equity. Equity builds as you make payments and as your home appreciates in value. You can tap into equity through a home equity loan, HELOC, or cash-out refinance.
Why It Matters
Home equity is the difference between your home's market value and what you still owe on the mortgage. You build equity two ways: by paying down your loan principal each month, and through home price appreciation. On a $350,000 home with a $315,000 mortgage, you have $35,000 in equity (10%). If the home appreciates 3% to $360,500, your equity grows to $45,500 — even before accounting for your principal payments.
Equity matters for three reasons: it's wealth you're building with every payment, it determines when PMI drops off (at 20% equity), and it's borrowing power — you can tap equity through a HELOC or cash-out refinance for renovations, education, or other needs. The typical homeowner who stays 7 years builds $80,000-$150,000 in equity through payments and appreciation combined.
Real-World Example
Year 1: Buy $350K home, 10% down. Equity: $35,000. After 5 years (3% annual appreciation, $1,600/month payments): Home value ~$406,000. Mortgage balance ~$293,000. Equity: ~$113,000 — from $35K to $113K in 5 years. That's $78,000 in wealth you wouldn't have built by renting.
Pro Tip
Use our home equity calculator to track your equity growth over time and see when you can drop PMI or qualify for a HELOC.