What is "equity" in real estate?

Equity in real estate refers to the difference between the market value of a property and the amount of outstanding mortgage debt associated with that property. This measure represents the owner’s stake or interest in the property. For instance, if a home is valued at $300,000 and the owner owes $200,000 on the mortgage, the equity in the property would be $100,000. This equity can be leveraged for various financial purposes, such as home equity loans or lines of credit.

Understanding equity is critical for homeowners and real estate investors, as it reflects both the value of the investment and the financial commitment they have to their property. It also plays a significant role in determining the homeowner's wealth and the potential selling price they could realize when the time comes for them to sell.

Other options do not accurately define equity in the context of real estate: the potential selling price of a property simply indicates what it could be sold for but does not account for any loans; the total value of the property before selling is ambiguous, as it does not specify debt amounts; and the cost of improvements made to a property pertains to investment inputs rather than the financial stake an owner has in the property.