What is home equity?

Home equity represents the portion of a property's value that the homeowner actually owns, which is calculated as the difference between the current market value of the property and any outstanding mortgage balances. This concept is crucial in real estate because it reflects the homeowner's investment in their property.

For instance, if a house is valued at $300,000 and the homeowner owes $200,000 on their mortgage, the home equity would be $100,000. This equity can be leveraged in various financial decisions, such as home equity loans or lines of credit, which utilize this amount as collateral.

Understanding home equity is vital for homeowners because it can affect their financial stability, borrowing capacity, and decisions on selling or refinancing their property. The other options do not accurately describe home equity; thus, they do not address this key financial concept.