Equity (home)

Home equity is the difference between a property’s current market value and the outstanding mortgage balance. A $500,000 house with a $350,000 mortgage has $150,000 of equity. The owner can borrow against it (HELOC, cash-out refi), liquidate it on sale, or simply hold it.

Two engines grow home equity:

• Amortisation. Each monthly payment reduces the principal balance, mechanically increasing equity. The pace is front-loaded with interest in the early years — see amortisation — so equity build-up accelerates over the life of the loan.
• Appreciation. If the property’s market value rises, equity rises by the full appreciation amount (the mortgage doesn’t scale up). US home prices have appreciated roughly 4-5% per year long-term, though regional and decade-by-decade variation is large.

Equity is the basis of several common moves:

• Cash-out refinance — increase the mortgage balance to pull cash out of accumulated equity. Costs roughly the same as a regular refinance plus a slightly higher rate.
• Home equity line of credit (HELOC) — a revolving credit line secured by the equity, typically at variable rates 1-3% above the prime rate.
• Sale. Equity converts to cash at closing (minus transaction costs of typically 6-8% in the US).

Important caveat: equity is illiquid. Tapping it costs money (closing fees, interest on the borrowed amount) and carries risk (you’re leveraging a depreciating asset if the market turns). Most financial planners treat home equity as a separate bucket from liquid net worth.