Equity is the difference between the current fair market value of a property, and the outstanding amount owed on the mortgage. In other words, equity is the part of the home that the homeowner truly owns, because he or she has repaid that amount over time in mortgage payments. If the homeowner were to sell the home before the end of their mortgage term, the equity would be the amount they'd walk away with after settling their debts with the bank.
Generally speaking, equity can be represented by the following formula:
Equity = Assets - Liabilities
To calculate your current equity on a given home, you need to know 2 things:
- How much your home is currently worth. This value should be obtained through a market analysis conducted by a real estate professional or an appraiser, because it must match up with your mortgage lender's determination of fair market value.
- How much principal is still left to pay as debt on your mortgage loan. Use our mortgage calculator to understand how principal and interest payments are distributed in an amortization schedule, along the course of your mortgage term.
Once these two values are obtained, you can easily calculate your equity by subtracting the outstanding debt (the principal left to pay on the loan) from the current market value of the home.