How is equity calculated?

Equity in real estate refers to the difference between the current market value of a property and the outstanding balance on any loans secured by that property. To calculate equity, you take the home value, which represents what the property could sell for in the current market, and subtract the loan balance, which is the amount still owed to the lender.

When you perform this calculation, you are essentially determining the homeowner's stake in the property. A higher equity value indicates that the homeowner owns a larger share of the property, while lower equity suggests more of the property is financed through loans. This measure of equity is essential in making informed decisions about buying, selling, refinancing, or borrowing against a property.

The other options do not correctly represent how equity is defined or calculated. For instance, subtracting repairs from home value does not take into account the loan balance and therefore does not provide a complete picture of equity. Adding the loan balance to the home value incorrectly suggests that the total amount owed contributes positively to the homeowner's investment, which it does not. Multiplying home value by loan balance is mathematically inaccurate as equity is derived through a subtraction process, not multiplication.