Equity in a home is the difference between what your home is currently worth and what you owe on your mortgage. For instance, if you owe $200,000 on your mortgage and your property is worth $250,000, then you have $50,000 of equity in your property.
How does home equity work?
If all or some of your property is purchased using a home loan, then your bank or mortgage lender will have an interest in your property. This continues until the mortgage is repaid.
The down payment that you’ve made on your home is the equity that you initially have. Following the down payment, your equity keeps growing with every mortgage payment you make. This is because every payment made reduces the outstanding principal owed.
How home equity increases
There are two ways by which home equity increases. First, the more money you pay on your mortgage, the more the equity in your home will increase. Second, if the value of your home increases, your equity will also increase.
How home equity decreases
Conversely, the equity in your home can also decrease. This can happen if the value of your property falls faster than the speed you’re paying down the principal balance of your mortgage.