How is equity in real estate defined?

Equity in real estate is defined as the difference between a property's fair market value and the outstanding debt secured by that property. This definition captures the ownership interest that a property owner has in their asset. When a property appreciates over time or if the owner pays down their mortgage, the equity increases. For example, if a home is worth $300,000 and the remaining mortgage balance is $200,000, the homeowner has $100,000 in equity.

This concept is crucial for understanding how much of a property the owner actually owns free and clear, as opposed to how much is owed to lenders. It is a central aspect of real estate transactions, influencing decisions like refinancing, selling, or leveraging the property for further investment.