What is meant by "equity" in real estate?

Equity in real estate refers to the amount of ownership interest in a property that an individual holds, which is the difference between the current market value of the property and the amount owed on any mortgages or liens against it. Essentially, equity represents the portion of the property that the owner truly owns free and clear. As a property appreciates in value or as the owner pays down their mortgage, the equity in the property increases.

This concept is critical for homeowners because it not only reflects their stake in the property but also influences the possibility of refinancing, selling, or leveraging the property for loans. For instance, if a homeowner bought a house valued at $300,000 and still owes $200,000 on the mortgage, their equity would be $100,000. This portion can be pivotal when making financial decisions regarding the property, including potential investments or improvement plans.