Equity

The difference between a home’s market value and the amount the owner owes on the mortgage

Equity is the amount of money you’d have if you sold your home today and paid off your mortgage – it includes your down payment, all the payments you’ve made against the loan’s principal and any appreciation in your home’s value. As the market value of your home increases, so does your equity.

Similarly, if your home’s value decreases, your equity does too.

One of the main advantages of owning a home is that you can tap into the equity to use for other investments, such as a down payment on another home, college tuition or mutual funds. You bought your home 3 years ago for $110,000 with a $20,000 down payment. Your property's value went up by 3% every year and you've paid off $4,574 of your principal.

If you add the down payment, total appreciation and the amount paid off on your principal, your total equity after 3 years is $34,773.