Home equity

Equity is what would be left for you if the home were sold today and the loans on it were paid off from the proceeds. It starts as the down payment, grows by the principal in every mortgage payment and by whatever the market adds to the home's value, and shrinks when the market falls or when a line of credit is drawn against it. The house counts in net worth at its full value with the mortgage as a separate liability, and the equity is all the house adds, so a $463,700 home with $337,000 still owed contributes $126,700, not $463,700.

In a sentence

• "They have about $126,700 of home equity: the house would sell for $463,700 and the mortgage is down to $337,000."
• "Every mortgage payment adds a little home equity, and a falling market can take more of it away without a single missed payment."
• "The home's value is what a buyer would pay. The home equity is what you would walk away with."

How it's calculated

Home equity = the home's current value − every loan secured by it

1. Estimate what the home would sell for today, from recent sales of comparable homes nearby or an online estimate treated as a range, never from the purchase price or a neighbor's asking price.
2. Subtract the mortgage balance, the remaining principal on the statement.
3. Subtract any other loan secured by the home: a home equity loan at its balance, a line of credit at the amount drawn rather than its limit.
4. Read the result as a share of the value when a lender will: equity divided by value is the figure behind loan-to-value ratios, and on a conventional loan, 20% is usually the point at which private mortgage insurance can be asked to stop.

Selling costs, commonly several percent of the price, come out of the equity on the day of a sale, so the figure you would walk away with is a little less than the figure on the sheet.

An example

A $400,000 home bought with 10% down, a $360,000 mortgage at 6.5% over 30 years, and a value that rises 3% a year, all of them the example's assumptions.

In five years the equity has grown from $40,000 to $126,700. Only $23,000 of the $86,700 came from the household's payments, the principal in sixty installments of $2,275, slowly at first because most of each early payment is interest; the other $63,700 came from the market, and the market's part can reverse. The share of value crosses 20% during the third year, the point at which private mortgage insurance on a conventional loan can usually be asked to stop. Net worth never shows the $463,700 on its own: it shows the house on one side, the mortgage on the other, and the $126,700 as the difference.

Why it matters

Equity is the figure behind most of the decisions a homeowner faces: whether private mortgage insurance can be dropped, how much a lender will let you borrow against the home, whether a sale would leave you with cash or a shortfall, and whether refinancing is available at all, since a lender reads equity as the margin that protects the loan. Equity is not cash, though: it cannot pay a bill or cover an emergency without a sale or a loan against it, and the loan is a new liability. A household with a large net worth made mostly of equity can still be short in a bad month, which is why liquid net worth leaves the house out on purpose.

Home equity versus home value

Home value is what a buyer would pay for the house today; home equity is what you would keep after paying off the loans on it. The value goes on the asset side of net worth in full and the mortgage on the liability side in full, so that the balance, the part you control, stays visible on its own line, and the equity is the difference. Two homes worth $463,700 can carry $126,700 of equity and $20,000, and only the second owner is one bad market year from owing more than the house is worth. See Does a house count toward net worth, and how to value it for how to set the value by a method you can repeat.

Common questions

Is home equity the same as net worth? No. Equity is one line of net worth, the house's contribution, and net worth adds every other asset and subtracts every other debt. A household can have $126,700 of equity and a net worth well below that if it carries other loans, or well above it with a retirement account on the sheet.

Can I spend my home equity? Not directly. Equity becomes cash only through a sale, a home equity loan, a HELOC or a cash-out refinance, and the last three replace equity with a new liability secured by the home. Until one of those happens, the equity is a figure on the sheet rather than a balance in an account.

What is negative equity? Owing more on the home than it would sell for, usually called being underwater. It happens when the value falls faster than the balance does, most often early in a loan with a small down payment. The house is still an asset and the mortgage still a liability; the difference is negative until one of them moves.

How does a HELOC affect home equity? By the amount drawn, not the limit. A line with a $50,000 limit and $10,000 drawn reduces the equity by $10,000, and the house's value on the asset side is unchanged. See How to count a 401(k) loan, a HELOC, or a car lease in net worth.

Go deeper

• Does a house count toward net worth, and how to value it sets the value by a method you can repeat, gross or net of selling costs, and separates the market's share of equity growth from the payments' share.
• The Mortgage calculator estimates the full monthly payment on a home, principal and interest plus property tax, insurance, HOA dues and PMI, and the total interest over the life of the loan.
• How to count a 401(k) loan, a HELOC, or a car lease in net worth records a line of credit against the home at its drawn balance with the house unchanged.

Where it shows up in Zypper

Zypper keeps the house and the mortgage as two accounts and charts the result. The mortgage connects like other loans and contributes its remaining balance to the liability side of net worth, updating as payments post; the house is a manual account whose balance you set to the estimate and update once a year, so it counts toward net worth without a live feed and changes only when you change it. The net worth page nets the two with every other account and charts the total over time, so the mortgage's steady fall and the estimate's yearly step both show. See Net worth tracking and Manual accounts, or get started with Zypper to put the house on the sheet.