Equity is the value of an asset minus the liabilities (debt) against it. If a home is worth $400,000 and you owe $280,000 on the mortgage, you have $120,000 in equity.
Home Equity Example
Year 1: Home $400,000, Mortgage $280,000, Equity = $120,000 Year 5: Home $450,000, Mortgage $250,000, Equity = $200,000 Year 10: Home $500,000, Mortgage $200,000, Equity = $300,000
Equity grew from $120,000 to $300,000 through a combination of property appreciation and mortgage paydown.
Equity in Stocks
In investing, equity refers to ownership. If a company has 1 million shares and you own 1,000, you own 0.1% equity (ownership stake) in the company.
Why Equity Matters
Equity represents how much of the asset you actually own after accounting for debt. In a business, equity is what's left for shareholders after paying all creditors. In a home, equity is the net value you'd receive if you sold.
Building equity is building wealth. As mortgage debt decreases and property values appreciate, equity compounds, becoming a major wealth component for most households.
