The difference between the fair market value of an asset (like a home) and the amount of debt against that asset (like a mortgage balance).
There are several ways that homeowners can build equity in their properties. They include:
- Repaying the mortgage. Equity increases as the loan balance decreases.
- Appreciation over time. Real estate tends to increase in value over the long run, although it can fluctuate up and down in the short term. In the US, home appreciation averages about four percent per year.
- Improving the property. Home improvement projects can add value to the property while making the home more comfortable, secure, attractive or energy-efficient.
Home equity is an asset that can be borrowed against if necessary, using home equity loans, cash-out refinancing or a reverse mortgage. However, this asset should not be valued lightly or depleted thoughtlessly.