Equity is the difference between how much the
home is worth and how much you owe on the mortgage (or mortgages, if
you have more than one on the property).
You bought
a house for $200,000 with a down payment of $20,000
and hence borrowed $180,000. The day you buy the house, your
equity is the same as the down payment -- $20,000: $200,000 (home's
purchase price) - $180,000 (amount owed) = $20,000 (equity).
In five years later, if you have been making your monthly payments
faithfully, and have paid down $13,000 of the mortgage debt,
you will owe $167,000. During the same time, the value of the
house has increased. Now it is worth $300,000. Your equity is
$133,000: $300,000 (home's current appraised value) - $167,000
(amount owed) = $133,000 (equity)
