What is home equity and how does it work?

How home equity increases

Typically, there are two ways that equity in your home increases, which are:

The more money you pay on your mortgage, the more the equity in your home will increase
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. For instance, if the value of your property falls faster than the speed you are paying down the principal balance of your mortgage.

How home equity works

If all or some of your property is purchased using a mortgage loan, then your lender will have an interest in your property until the mortgage is repaid. As touched upon, home equity is the portion of your property’s value that you technically own.

This means that the down payment that you have made on your home is the equity that you have acquired initially. Following the initial down payment, your equity keeps growing with every mortgage payment you make, since every payment made reduces the outstanding principal owing.

How to determine equity in your home

If you want to know how much equity you have in your home, you will have to know the value of your property. One way to get an estimate is by looking at what properties like yours, in your area, have recently sold for. For instance, let’s say that number is $200,000. You would then subtract from that the balance of your home loan, which is, for instance, $125,000. That would make your equity $75,000.