What does the term "home equity" refer to?

The term "home equity" refers specifically to the difference between the market value of a home and the outstanding balance on any mortgage or loans secured against that property. This means that home equity is calculated by taking the current market value of the home and subtracting the amount still owed on any mortgage. For instance, if a home is valued at $500,000 and the homeowner has $300,000 remaining on the mortgage, the home equity would be $200,000.

This concept is crucial for homeowners because it represents the portion of the property that they truly own and can use as collateral for loans, or realize as profit when selling the home. Recognizing the calculations and implications of home equity allows homeowners and financial professionals to make informed decisions regarding refinancing, home equity loans, and overall financial planning related to real estate.