What does the term "equity" mean in relation to homeownership?

The term "equity" in relation to homeownership specifically refers to the difference between the home's market value and the outstanding mortgage balance. This concept is crucial for homeowners because it represents the portion of the property that they truly own outright. For instance, if a homeowner has a house valued at $300,000 and owes $200,000 on their mortgage, the equity in the home would be $100,000.

Equity can increase over time, not only as the homeowner pays down the mortgage but also as the value of the property rises due to market appreciation. This accumulated equity can serve as a financial asset that can be tapped into through avenues like home equity loans or lines of credit, providing flexibility and potential funding for various financial needs. Understanding this concept is essential for making informed decisions regarding homeownership, financing, and investments.