What does 'equity' refer to in real estate?

Equity in real estate is defined as the difference between the market value of a property and the amount owed on any existing mortgage. When homeowners build equity, it generally means that their home is worth more than the total debt secured against it. This can happen as property values increase over time or as mortgage balances decrease through regular payments.

Understanding equity is essential for real estate transactions, as it plays a critical role in determining how much a homeowner can borrow against their property or what they might receive when selling it. When a property appreciates in value, the equity can increase significantly, providing financial opportunities for the homeowner.

Recognizing that equity is not simply the total value of the property or the mortgage amount helps clarify the concept further. While the total value reflects what the property could sell for in the market and the mortgage amount is what is owed to the lender, equity is specifically focused on the homeowner's stake in the property after debt is accounted for. Potential appreciation, while important, does not explicitly define equity itself but rather contributes to its growth over time.