The portion of your home's value that you own outright. Calculated as the home's current value minus the mortgage balance you still owe.
Equity is the part of your home that's actually yours. It's the difference between what your home is worth right now and what you still owe on the mortgage.
You build equity two ways: by paying down your loan (every monthly payment shifts a little more from interest to principal) and by your home's value going up over time. Down payments are basically prepaid equity — the bigger your down payment, the more equity you start with.
Equity matters because it's wealth you can tap into later. Once you have enough equity (usually 20% of the home's value), you can borrow against it through a home equity loan or HELOC, you can refinance to drop mortgage insurance, and when you sell, the equity is the money you walk away with.
Example
You buy a $400,000 home with $80,000 down, so you start with $80,000 (20%) in equity. Five years later, your home is worth $450,000 and your loan balance is $295,000 — your equity is $155,000.
Formula
Equity = Current home value − Current mortgage balance
Also known as
home equity, ownership stake