What does the term “equity” refer to in home financing?

The term "equity" in home financing specifically refers to the difference between the home's current market value and the outstanding balance on the mortgage. Essentially, equity represents the portion of the property that the homeowner truly owns, free and clear of any debt. For example, if a home is valued at $300,000 and the mortgage balance is $200,000, the homeowner has $100,000 in equity.

This concept is crucial for homeowners because it can impact borrowing options, financial security, and the ability to tap into funds through home equity loans or lines of credit. Understanding equity helps homeowners make informed decisions regarding selling their property, refinancing, or taking advantage of financing options based on their ownership stake in the home.