Home equity refers to the portion of a home's value that is held by the homeowner free of any debt. Typically, a homeowner has equity equal to the original down payment plus the accumulated monthly principle payments minus any money borrowed through home equity lines of credit ("HELOCs") plus/minus the change in the home's value.
For example, if you own a home worth $200,000 and you owe $125,000 on your mortgage and have no further loans, you have $75,000 in home equity. If you also have a home equity loan of $50,000, then you have only $25,000 in home equity.
It is the equity in the home that allows it to be used as collateral for second mortgages, HELOCs, or liens. Home equity is also a significant source of retirement savings for many people, both as a reduction of expenses (a paid-off house requires only taxes and maintenance) and as a capital resource.
"Negative equity" or "underwater mortgages" refer to situations in which a homeowner owes more on the home than the home is currently worth. This situation was rare before the housing and credit boom of the 1990s and 2000s collapsed. During those decades, rapidly-rising house prices and easy credit enabled many homeowners to treat their homes like very large credit cards, taking out home equity loans for everything from renovations to major purchases to basic living expenses. However, when the housing bubble burst and prices fell, many homeowners ended up owing more than their houses would sell for.
Related Fool Articles
Recent Mentions on Fool.com
- Exotic Mortgage Loans Are Making a Comeback: Should We Be Worried?
- 7 Ways the Federal Reserve Affects You and Your Money
- How Your Mortgage Terms Could Make or Break Your Early Retirement
- How the 3 Richest Men in the World Became the Wealthiest of the Wealthy
- Why a Billionaire Hedge Fund Manager Is Betting Big on Fannie Mae and Freddie Mac
- Stocks: Williams Companies Considers "Alternatives"; for Greece, They're Dwindling