Real Estate
Equity (Real Estate)
Equity is the difference between a property's current market value and the amount owed on the mortgage, representing the owner's ownership stake in the property.
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Exam Tip
Equity = Value - Mortgage. Equity builds through payments and appreciation.
What is Real Estate Equity?
Equity is your ownership stake in a property—the portion you actually "own" free and clear. It's calculated as the property's value minus what you owe.
Equity Formula
Equity = Property Value - Mortgage Balance
Example:
- Home value: $400,000
- Mortgage balance: $250,000
- Your equity: $150,000
How Equity Builds
| Method | Description |
|---|---|
| Mortgage Payments | Principal portion reduces loan balance |
| Appreciation | Property value increases |
| Improvements | Adding value through renovations |
| Larger Down Payment | Start with more equity |
Using Home Equity
| Option | Description |
|---|---|
| Home Equity Loan | Lump sum loan, fixed rate |
| HELOC | Line of credit, variable rate |
| Cash-Out Refinance | New mortgage for more than owed |
| Sell Property | Convert equity to cash |
Loan-to-Value (LTV) Ratio
LTV = Mortgage Balance ÷ Property Value
Example:
- $250,000 mortgage ÷ $400,000 value = 62.5% LTV
- Your equity = 37.5%
Negative Equity (Underwater)
When you owe more than the property is worth:
- Common after market crashes
- Can't sell without paying difference
- May qualify for short sale