What Is Home Equity in Real Estate?
Home equity is the portion of your property that you truly own—calculated as the home’s market value minus any outstanding mortgage balance. As you pay down your loan or your home appreciates, your equity increases.
✅ How Home Equity Works
You build home equity in two main ways:
- Paying down your mortgage principal — reduces your loan balance and increases equity.
- Home value appreciation — rising market value expands your equity even if your loan balance stays the same.
Equity Formula:
Home Equity = Current Market Value − Mortgage Balance
Example:
- Home value: $500,000
- Mortgage balance: $320,000
- Home equity = $180,000
📊 Why Home Equity Matters
Equity plays a central role in homeownership and financial planning. It affects your borrowing power, selling options, and ability to refinance.
- More profit when selling: High equity = higher net proceeds.
- Improves refinancing terms: Lenders offer better rates for strong equity positions.
- Unlocks borrowing options: Enables HELOCs and home equity loans.
- Reduces risk: More equity means less chance of being “underwater.”
💡 How to Build Home Equity Faster
- Make extra principal payments: Reduces loan balance quicker.
- Choose a shorter loan term: 15-year mortgages build equity faster.
- Improve your home: Strategic renovations can increase market value.
- Buy in appreciating markets: Rising home prices automatically build equity.
Your equity grows naturally over time, but intentional financial strategies can accelerate the process.
🏡 Home Equity & FSBO Sellers
Equity is especially important for FSBO sellers because it determines your expected profit at closing. The more equity you have, the more flexibility you gain with pricing strategy and negotiations.
Sellers with high equity often experience smoother closings, even if a buyer’s financing hits minor issues.
Learn more about mortgage fundamentals in the Mortgage Guide.