What is equity? For noobies

Home equity is a homeowner's interest in a home.

Home equity is the market value of a homeowner's unencumbered interest in their real property, that is, the difference between the home's fair market value and the outstanding balance of all liens on the property.

Equity is the market value of real property, less the amount of any liens that may exist.

Confused yet? Interest, market value, outstanding balance, liens, fair market value.. what??!!!?!!?!??

That's how I felt when I was trying to learn what equity meant. There were so many definitions that used other words that just confused me further.

Lets cut to the chase. But before I give my definition of equity (after a week of reading about nothing but equity), let me give you a couple definitions you should know.

• Market value - how much your house is worth on the market if you were to sell it right now.
• Outstanding balance - what is left that you still owe on the house. Common expenses would be the loan for the house itself, property taxes, interest owed and insurance.
• Appreciation - how much the house is going up in value. For example if a house that is worth $100,000 went up to $101,000 in market value, you could say it appreciated by 1%.
• Principal - this is amount of money you borrowed from the loan that is going towards your house. If your house costs $100,000 and you get a loan for $100,000 then that is your principal that you have to pay back.
• Interest - this is the amount money you borrowed from the loan that is going towards the lender/bank. If you get a loan for $100,000 at 4% interest, you have to pay back that accruing fixed interest.

Great, now you are ready for my noobies definition for equity.

Equity is how much of the properties value is actually yours.

Wait, that's it?

How do you determine how much of the value is yours?

Well you have to add up all the things you've paid towards the property and subtract all the things that you owe on the property.

Common items that you still owe on a property:

• The loan you have on the property
• Any property taxes (If you haven't been paying them, but its usually wrapped up in your monthly mortgage)

Common items that helped you build your equity:

• Principal % of your mortgage payment
• Money paid towards the down payment when the property was purchased
• Additional payments paid towards the mortgage principal
• Appreciation of the property

Now let's do an example of all these things.

You have a house that's worth $100,000. You've paid a mortgage payment for 6 months of $1,000 each month. $100 of each of those payments go towards the principal of the property. When you bought the house you put a down payment of $20,000. The house has appreciated 1% in these 6 months. You made no additional payments towards the principal of the house since you've owned it.

$100x6 ($600 of mortgage payments going towards principal) + $20,000 (down payment when purchased the house) + $1,000 (1% of $100,000 for appreciation)

This equals $21,600 in equity. That is how much of your properties value is yours. The rest of the $100,000 still belongs to the lender.

Remember this is a very basic and most common example for equity. There are many other expenses or equity additions that are probably out there, but this should get you started with understanding the basics of equity in it's most common form.

Hope this helped! See y'all next time.