Definition

• Equity is an accounting concept that draws on the rules of financial reporting and bookkeeping. For a company or individual, equity capital is also called net worth and equals total assets minus total debts. The equity in your home follows the same approach: Your home equity equals the property's value --- the asset amount --- minus the debt on the property, which is the mortgage. If you perform improvements on the property, you can add the expenses to the property value to determine its new worth. Having equity in your home enables you to tap into that "theoretical wealth" to finance day-to-day activities or long-term plans. Home equity is "theoretical wealth" because you don't make a profit until you actually sell the property. Similar to stock-market fluctuations, home equity amounts depend on economic factors.
  
  

Pledging the Property as Collateral

• As a homeowner, you may use the equity in the property by applying for a Home Equity Line of Credit. A HELOC is similar to a loan, with the difference that the lender advances funds based on the equity amount. If you don't have equity in your home, you cannot qualify for a HELOC. If you previously qualified for a HELOC and later lost the equity in your house --- because of a drop in real estate prices --- you still need to repay the loan. For example, your home is currently valued at $250,000. The mortgage balance on the property is $200,000. This generates an equity amount of $50,000, or $250,000 minus $200,000. You may qualify for a HELOC up to $50,000.
  
  

Selling the Property

• Having positive equity in your home when you're planning to sell the property is a welcome scenario. The opposite may not be favorable, especially if you sell the property in a bad economy in which residential property prices are falling. To illustrate: you plan to sell your home for $300,000, which is the average value of homes with similar characteristics in your neighborhood. The mortgage principal amount is $300,000, and you have a $25,000 outstanding HELOC balance due. Because you don't have equity in your home, you're still liable for $25,000 and need to repay this amount.
  
  

Expert Insight

• Measuring the equity in your home and the factors affecting equity amounts requires financial expertise and mathematical dexterity. You can seek the guidance of a professional, such as a financial planner, to help you evaluate the equity in your home and the implications on your finances.