What does "equity" refer to in real estate?

"Equity" in real estate specifically refers to the difference between the market value of a property and the outstanding balance of any mortgages or liens against that property. This concept is crucial for understanding an owner’s financial stake in the property.

When a homeowner purchases a property, they build equity as they make mortgage payments that reduce the mortgage balance. Additionally, as the property's market value increases over time, equity also increases. For instance, if a property is valued at $300,000 and the homeowner owes $200,000 on the mortgage, the equity in the property would be $100,000. This figure represents the actual ownership stake of the homeowner in the property, which can be leveraged for various financial decisions, such as refinancing, taking out a home equity loan, or selling the property.

Understanding equity is essential for homeowners and real estate investors because it illustrates how much wealth is accumulated in their real estate investments.