Equity

Before you rely on it

What to check

Use a current valuation, not the purchase price and not a hoped-for one.

The common error

Where people go wrong with equity

Counting appreciation that has not been tested by an appraisal. Equity built on an optimistic estimate is not equity a lender will lend against, and it evaporates the moment a real valuation happens.

Worked through

Equity in plain numbers

A home is worth $400,000 and the mortgage balance is $270,000. Equity is $130,000, or 32.5% of the value. Now the market softens and the home is worth $360,000, a 10% drop, and the mortgage has not changed, so equity falls to $90,000; a 10% fall in value cost you almost 31% of your equity, because debt magnifies the swing. Pay the mortgage down by $10,000 and equity rises by the same amount. In a company, equity works the same way: assets minus liabilities, the owners' share of what is left.

Easily confused

Equity and its neighbours

Equity is not the same as value or as cash; a home worth $400,000 with a $270,000 loan has $130,000 in equity, and that is not $130,000 you can spend. To get at it you must sell, borrow against it or refinance. In investing, equity also means stock, ownership shares in a company. In a business, owner's equity is on the balance sheet. And sweat equity is contribution of work in place of money, and the word always points to what remains for the owner after obligations are subtracted.

In real decisions

Where equity turns up

Homeowners track equity to know their net position and to decide about refinancing, home equity loans or selling; lenders use it to set loan-to-value limits; investors talk about equity investments when they mean stocks. Companies show shareholders' equity on the balance sheet. Divorce, estate and tax calculations often start from equity. Anyone thinking about borrowing against a home should look at equity first and consider how much cushion will remain.

Know the edges

Where equity stops being reliable

Equity depends on a value estimate, which can be wrong, and on costs of selling that reduce what you would actually receive. Values move, so equity moves with them. Borrowing against equity increases risk and can leave you owing more than the property is worth if values fall. Estimates from calculators or online valuations are rough. An appraisal or an agent's opinion gives a better basis when the decision is significant.

Quick answers

What people ask about equity

What is the difference between equity and net worth? Equity refers to the owner's stake in one asset or a company. Net worth is everything you own less everything you owe. Home equity is one part of it.

Can I lose equity without missing payments? Yes. If the asset's value falls, equity shrinks even while the loan balance is unchanged. Rising values increase it.

How do I build equity faster? Pay more toward principal, choose shorter terms or improve the asset in ways that add value. Market changes are outside your control.