Final answer:
Home equity is the value of a homeowner's interest in their property, serving as a substantial financial asset. It is the difference between the property's market value and the outstanding loan amount. Home equity accounts for a significant portion of wealth, especially for the middle class, and plays a vital role in financial planning and stability.
Step-by-step explanation:
Home equity represents a financial asset and is often the largest component of an individual's wealth. Specifically, it is the monetary value a homeowner has in their property, which is calculated by subtracting any outstanding bank loans from the market value of the house. As an example, if you buy a house for $200,000 with a down payment of $20,000 and a bank loan for the remaining $180,000, over time as you pay down the loan and possibly the home's value increases, your equity increases.
For instance, if the loan balance drops to $100,000 and the home's market value rises to $250,000, the homeowner's equity would be $150,000. This is pivotal for many middle-class Americans, as it represents their single greatest financial asset. After the global financial crisis, understanding and building home equity took on renewed importance and is discussed in various financial literature. Federal Reserve data indicated that the total value of all home equity held by U.S. households reached $23.6 trillion by mid-2021.