Homeownership Equity

To understand Equity, we are going to take the normal home ownership model to explain it. Let’s take a look at the Accounting Equation to start.

First of all, what is an asset?

Simply, it's just anything of value that you own which has the potential to generate future economic benefits. Assets can take many forms, but in this instance we will use a property as an example.

A liability is any debt that is owed on the asset. The most common liability for homeownership is a mortgage.

Equity refers to the ownership value that an individual or entity holds in an asset after all debts and other obligations related to that asset have been paid off. If we want to use the Accounting Equation

$$Equity = Assets - Liabilities$$

In the normal home equity model the individual is the stakeholder. Let’s take this model from above and apply it to an individual purchasing a $500,000 home. The individual has $200,000 to put down on the purchase of the home, so a $300,000 mortgage is taken out.