What is Equity?
Equity is the amount of the house you truly own. It’s the difference between your loan balance and your home’s market value. If you sold your house and paid off the bank, the value of your equity is what you’d walk away with.
Equity is an asset. When you build equity, you increase the net value of your asset. One way to do this is by paying off your mortgage. Every month, a portion of your mortgage payment helps you build equity. You owe a little less, which means you own a little more.
- See how the process works when you pay off a loan: How Amortization Works
You can also build equity as your home’s value increases. This may happen over time in a favorable market, or it may happen as a result of something you do. For example, if you increase your home’s value by improving the kitchen, you build equity (assuming you don’t borrow against the home to make improvements).