What home equity really means
THE HOME GUIDE · 13
What home equity really means
Your home may be worth a lot of money. But how much of that value actually belongs to you?
ABOUT 7 MINUTES TO READ
THE BASIC IDEA
Estimated home value
$800,000
Minus debt secured by the home
− $500,000
ESTIMATED HOME EQUITY
$300,000
Example only. The value of your home can change. Selling costs are not included.
People often hear that a neighbour sold for a high price and wonder if their own home has made them wealthy.
But a selling price tells only part of the story. A mortgage, other loans and the cost of selling can change what is left.
That is why understanding home equity matters, even when you have no plans to move.
01 / THE FOUNDATION
What is home equity?
Home equity is the part of your home’s value that is left after you subtract the debt secured by it.
That debt can include your mortgage, a home equity line of credit (HELOC), or another loan secured by your property.
The idea is simple. The harder part is knowing what your home could really sell for and the exact amount you owe.
02 / HOW EQUITY GROWS
There are two main ways to build equity.
Part of your regular mortgage payment may go toward the amount you borrowed. This is called the principal.
As your principal goes down, your equity can grow even if home prices stay the same. Interest payments do not reduce the principal.
If your home rises in value while your debt stays the same, your equity grows.
But prices can fall too. Home equity can shrink even while you make every mortgage payment on time.
A home going up by $100,000 does not mean the owner earned $100,000 in cash. That change is only a gain in estimated value until the property is sold or used to secure a loan.
03 / THE BIG DISTINCTION
Equity and cash are different.
Let's return to the home worth $800,000.
WHAT MAKES UP THE HOME'S VALUE?
$500,000 — Debt secured by the home
$300,000 — Estimated equity
If the owner sells, the mortgage and other secured debt must be paid. There may also be legal fees, real estate fees, loan penalties and other selling costs.
ILLUSTRATIVE SALE
Home sold for: $800,000
Secured debt paid: $500,000
Example selling costs: $25,000
ESTIMATED CASH LEFT
$275,000
Selling costs are an example, not an estimate for a specific sale. Taxes, adjustments and other amounts may also apply.
04 / BORROWING AGAINST YOUR HOME
Can you use equity without selling?
Sometimes. A lender may allow you to borrow against your home through a HELOC or another secured loan.
This can help pay for major repairs or other needs. But it is still borrowed money. You pay interest, and your home is used as security.
The question worth asking
If you borrow $40,000 against your home, how will you pay back the $40,000 and the interest?
Borrowing adds debt. It does not create new equity. A larger loan can also leave you with less money when you sell.
Before borrowing, compare the interest rate, fees and repayment plan. Ask what happens if rates rise or your income changes.
05 / BUILDING WEALTH OVER TIME
A home can build wealth. It also costs money to own.
Your original purchase price and your future selling price matter. But they are only two numbers.
You also pay interest on borrowed money, property taxes, insurance and the cost of keeping the home in good shape.
Money going in: Your down payment, mortgage payments, repairs and other home costs.
Value you build: The principal you repay and any rise in your home's market value.
Money left when you sell: The sale proceeds after debts, selling costs and any applicable taxes.
This helps explain why two owners may sell for the same price but have very different financial results.
It also explains why the right home is not always the one expected to rise the most in value. Being able to afford and maintain it matters too.
06 / TAXES MATTER
What about the tax-free gain people talk about?
In Canada, you may qualify for the principal residence exemption when selling the home you live in.
If the home meets the rules for every year you owned it, the gain may be free of capital gains tax.
The rules can be different if you rented out part of the home, used it for business, owned more than one property or changed how the property was used.
You must report the sale and make the required principal residence designation on your tax return, even if the full gain is exempt.
Ask a qualified tax professional how the principal residence rules apply to your property. A rental or investment property can have different tax results.
07 / TEST YOUR UNDERSTANDING
What happens to equity when things change?
Start with a home worth $800,000 and $500,000 in secured debt. Its equity is $300,000.
The home's value drops to $720,000. What happens?
If the debt stays at $500,000, equity falls to $220,000. The owner has $80,000 less equity, even though the debt did not change.
The owner pays off $20,000 of principal. What changes?
With the home still worth $800,000, secured debt drops to $480,000. Equity rises to $320,000.
The owner borrows $40,000 more against the home. What changes?
Secured debt rises to $540,000. If the value is still $800,000, equity falls to $260,000. The owner received borrowed money and now owes more.
08 / SOMETHING USEFUL TO DO
Check your equity once a year.
You do not need to track home prices every day. A simple yearly review can tell you more about your financial position.
□ Get your current mortgage balance.
□ Include any HELOC or other debt secured by your home.
□ Review recent sales of similar homes for a rough value range.
□ Subtract your secured debt from that value range.
□ If you may sell, estimate selling costs and any loan penalties separately.
Remember that a rough market estimate is not a formal appraisal or a promise of what your home will sell for.
The most useful number is not always your home's price.
Knowing what you own, what you owe and what your home costs to keep can help you make better choices.
That matters whether you plan to buy, sell, borrow against your home or stay where you are.
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