Home equity is often described as the main financial benefit of owning versus renting - understanding exactly what it is and how it grows makes that claim easier to evaluate honestly.

What home equity actually is

Home equity is the difference between a home’s current market value and the remaining balance owed on any mortgage against it. It’s genuinely an asset, in the same sense as an investment account covered in the investing module, but a distinctly illiquid one - it can’t be spent directly without either selling the home or borrowing against it.

Two separate ways equity grows

Equity builds through two genuinely distinct mechanisms: paying down the mortgage principal, covered in the amortization lesson earlier in this module, and appreciation - the home’s market value increasing over time. The first is a direct result of making payments; the second depends entirely on the local housing market and is never guaranteed.

Borrowing against equity

A home equity loan provides a lump sum borrowed against a home’s equity, repaid on a fixed schedule, similar in structure to other installment loans covered in the credit and debt module. A HELOC, or home equity line of credit, works more like a credit card secured by the home - a revolving credit line that can be drawn from and repaid repeatedly, up to a set limit.

Why this connects to the rest of this module

Appreciation - one of the two sources of equity growth covered here - depends heavily on the broader housing market and interest rate environment, exactly the subject of the next lesson.