What is home equity?

Home equity is the amount a homeowner owes on a house's mortgage and/or other loans on the house subtracted from the worth of the house. In many instances, home equity increases when a homeowner makes a monthly payment.

As time passes, larger and larger portions of home loan payments go toward the principal balance of a home loan instead of interest. During troubled economic times and in other scenarios, home values can drop, decreasing home equity. It is possible for a homeowner to have negative equity in his home. Because home equity is an asset, it counts toward a person's net worth.