What does the term "equity" refer to in real estate finance?

The term "equity" in real estate finance specifically refers to the difference between the market value of a property and the amount owed on the mortgage. This concept is central to understanding a homeowner's financial stake in their property.

When a property is valued at a certain market price, the homeowner's equity increases as the value of the property rises or as the outstanding mortgage balance decreases through payments. For example, if a property is worth $300,000 and the homeowner owes $200,000 on the mortgage, the equity would be $100,000. This equity represents the portion of the property that the homeowner truly owns and can be used in various financial decisions, like securing loans or selling the property.

In this context, the other choices do not accurately define equity: the total market value refers to the complete appraised value of the property, the amount owed on a mortgage indicates how much is still due to the lender, and the profit from selling a property refers to the money gained after deducting costs and expenses of the sale, which is not the same as the equity held in the property. Understanding these distinctions is crucial for effective real estate finance management.