The math behind equity

[Nathanael Giovanni Opoulos]

I can't seem to figure out how to search the biggerpockets forums. If someone else had already covered this question elsewhere I was unable to locate it.

It had only been a few days since I began learning about real estate. I have a cursory understanding of equity. My comprehension amounts to this example.

120k home purchased. 100k loan + 20k down. Equity starts at 20k and increases as 100k loan is paid off.

I.e. Equity = appraisal amount - remaining mortgage balance

I'm trying to determine if this is correct, and If so, is the calculation based on remaining principal or does interest factor into the equation somehow. Also, when you make a sale say 5 years in, is the remaining interest on the mortgage dissolved?

Thanks,

Nathanael Giovanni Opoulos

[Sevy Bialke]

@Nathanael Giovanni Opoulos

Try thinking of it in simpler terms before the details of debt. Equity is how much of the property you own. Or, equity is how much money you would get if you sold the property after paying everyone else whom also owns a part of the property (meaning interest is not a factor).

If you buy a property for all cash for 100k then you have 100% equity. If the market goes up and your property is worth 200k, then you still have 100% equity but at 200k. Vice versa if it goes down and the property is worth 50k, then you still have 100% Equity at 50k.

If you buy a property for 100k with 20% down and finance the other 80%, then the BANK owns 80% of that property at that time. You have 20k of equity and they have 80k of equity. If the property goes up in vale overnight to 200k, then the loan to the bank is still at 80k, but now 80k is only is only 40% of 200k l, implying you now have 60% equity or 120k of equity in the house.