Say What?

(financial terms explained in English!)

Lisa and Tom purchased a home for $130,000 and made a down payment of $50,000. They took out a mortgage loan with their credit union for $80,000. The amount of the home that they ‘own’ (remember, the rest is what they owe) is $50,000.

In financial terms, they have $50,000 in equity. 

Six months later, Lisa decides to start a small business and figures they can borrow money on their house. They order an appraisal and find the value is now $150,000. Both Tom and Lisa were thrilled with this discovery; now they have $70,000 in equity.  

Equity is the difference between the market value of a house (or other asset) and the unpaid principal balance of the mortgage plus any liens. The equity you possess will increase as mortgage principal is paid down and/or as the property increases in value.