What Is Equity in a Home?

Learning Objectives

By the end of this lesson, you should be able to:

• Calculate home equity given a property's value and loan balance.
• Explain two separate ways equity can increase.
• Explain two separate ways equity can decrease.

Core Content

The Equity Formula

Equity = Current Property Value − Remaining Loan Balance.

A home worth $350,000 with $220,000 still owed has equity of $130,000.

Two Ways Equity Goes Up

Equity increases when the loan balance is paid down (principal payments), and separately when the property's market value rises (appreciation). These are two different sources — one comes from the owner's payments, the other from the market.

Two Ways Equity Goes Down

Equity decreases when an owner borrows against the home (a home equity loan or HELOC converts equity into cash but increases what's owed), and separately when the property's value drops. Neither requires the owner to have done anything wrong.

Why Equity Isn't the Same as Cash

Equity represents value, not spendable cash sitting in an account. To use it, an owner generally has to sell the property or borrow against it — both create a new situation (ending ownership, or new debt).

Worked Example

A home is worth $400,000 with $150,000 owed: equity = $250,000. If the value drops to $370,000 with the loan balance unchanged, equity becomes $220,000 — a $30,000 drop caused entirely by the value change, not the loan.

Practice Quiz

1. A home is worth $280,000 and the owner owes $190,000. What is the

1. True or False: A drop in a home's market value increases the amount

1. Which of these increases equity?

Answer Key

1. A
2. False
3. C

Answers and Explanations

Question 1

Correct answer: A. $280,000 − $190,000 = $90,000.

Question 2

Correct answer: False. A value drop doesn't change the loan balance — it only affects equity, since equity depends on both numbers.

Question 3

Correct answer: C. Paying down the loan balance increases equity; so does the property's value rising (not listed as an option here, but covered in Core Content).

Key Takeaways

• Equity = Current Property Value − Remaining Loan Balance.
• Equity rises from paying down debt AND from the property gaining

• Equity isn't spendable cash — accessing it usually requires selling or