Equity is the amount of a property’s value, calculated by subtracting the amount the seller owes on the property’s mortgage loan from the final sale’s price of the property. In other words, equity is the amount of money a seller would make after paying off the bank.
If you purchase a $750,000 home for $600,000 and get a mortgage for that amount, you will have $150,000 equity when you move into the home. Assuming the market maintains steady upward growth, you will continue to gain equity. Let’s assume you live in the home 5 years and the market continues to grow and your home is now worth $1.1 million. You now have equity of $500,000. On the contrary, if the market goes south, your equity will decrease. In other words, if the market tanks, your home could be worth $500,000 and now you have negative equity of $100,000.