Equity
Equity is the difference between a home’s market value and the mortgage balance. Learn how equity grows and how it can be leveraged.
Definition
Equity represents the portion of a property’s value that the owner actually owns outright. It’s calculated by subtracting outstanding liens, such as the mortgage balance, from the property’s current market value. As Investopedia explains, home equity grows as you pay down the mortgage principal and as the property appreciates in value. Immediate equity is created with a sizable down payment, and additional equity accrues through regular mortgage payments. Owners can leverage equity through home equity loans, home equity lines of credit (HELOCs), or cash‑out refinancing to fund improvements, pay off debt, or finance major expenses. While equity is an asset, it’s not liquid and depends on market conditions.
Why It Matters
Equity is the number most sellers guess wrong, because the mortgage payoff is only the first deduction. Subtract commission, Washington real estate excise tax, and title and escrow fees, and a $600,000 sale with a $400,000 loan often nets closer to $155,000 than $200,000. That net figure decides whether you can buy the next house at all.
Examples
Bought at $520,000 with 5% down in 2019; by 2026 the balance is $445,000 against a $690,000 appraisal, giving $245,000 of equity, of which a lender will lend against roughly 85% combined.
A Tacoma seller closes at $612,000, pays $381,000 to the lender, about $8,300 in Washington excise tax, and $2,900 in escrow and title charges.
A 2022 peak buyer with 3% down finds that a 6% value drop plus selling costs means writing a check at closing rather than collecting one.
Tips
Pull a written payoff quote instead of reading the balance in your servicer's app. Payoff adds per diem interest and reconveyance and recording fees, usually a few hundred dollars more.
Before assuming a remodel adds equity, find sold comps that already have the feature. A $60,000 kitchen rarely appraises for $60,000 more.
If you plan to borrow against equity soon after buying, check seasoning rules first. Many lenders require six to twelve months of ownership before a cash-out.
Related Terms
Down Payment
A down payment is the upfront portion of a home’s purchase price. Learn why down payments reduce loa...
Home Equity Line of Credit (HELOC)
A HELOC is a revolving credit line secured by your home’s equity. Learn how draws, repayments, and v...
Principal
Principal is the original amount borrowed on a loan. Learn how principal decreases with payments and...
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