Equity vs. Market Value: Understanding the Difference for Homeowners

22 June 2025

When it comes to real estate, two financial terms often pop up—equity and market value. While both are crucial for homeowners, they serve different purposes. Some people think they’re the same, but trust me, they’re not.

If you’re a homeowner looking to sell, refinance, or just want to understand your financial standing, knowing the difference between equity and market value is a game changer. Let’s break it down in simple terms.

What Is Market Value?

Market value is the price your home would sell for in the current market. It fluctuates based on demand, location, condition, and overall real estate trends. This value isn’t set in stone—it changes based on what buyers are willing to pay.

How Is Market Value Determined?

Several factors influence a home’s market value:

1. Recent home sales – The best indicator of market value is comparable sales (comps) in your area. If a similar house in your neighborhood sold for $500,000, your home might be worth a similar amount.
2. Location – A house in a sought-after neighborhood can have a higher value than the same house in a less desirable area.
3. Home condition and upgrades – A well-maintained house with modern upgrades will usually be valued higher than a fixer-upper.
4. Market conditions – In a seller’s market (where demand is high), homes sell for more. In a buyer’s market (where supply is high), values can drop.
5. Economic factors – Interest rates, inflation, and job growth play a huge role in demand for homes, affecting their market value.

The best way to determine market value is through a real estate agent’s comparative market analysis (CMA) or a professional home appraisal.

What Is Home Equity?

Equity is the portion of your home that you truly "own" versus what you still owe the bank. It's the difference between your home’s market value and the remaining loan balance.

How Is Equity Calculated?

Here’s a simple formula:

Home Equity = Market Value – Mortgage Balance

Let’s say your home is worth $400,000, and you owe $250,000 on your mortgage. Your equity would be:

$400,000 – $250,000 = $150,000 in home equity

The more you pay down your mortgage, the more equity you build. But here’s the exciting part—you can grow your equity even faster if your home’s market value increases.

Key Differences Between Equity and Market Value

While they’re related, home equity and market value aren’t interchangeable. Here’s how they differ:

| Factor | Market Value | Home Equity |
|------------|----------------|--------------|
| Definition | The current price your home would sell for | The portion of your home you truly own |
| Fluctuation | Changes based on the real estate market | Increases as you pay down your mortgage or if the home value rises |
| Control | Largely influenced by the market | Homeowners can grow it by making payments or increasing home value |
| Usage | Determines how much your home could sell for | A financial asset that can be borrowed against or cashed out |

Why Home Equity Matters

You might be wondering, “Why does home equity even matter?” Here’s why:

1. You Can Borrow Against It

One of the biggest perks of home equity is that you can tap into it for financial needs. There are three common ways to do this:

- Home Equity Loans – A lump sum loan using your home as collateral. Great for major expenses like home renovations.
- Home Equity Line of Credit (HELOC) – Works like a credit card but secured by your home’s equity.
- Cash-Out Refinancing – Replaces your current mortgage with a new one for more than you owe, allowing you to pocket the difference.

2. Builds Long-Term Wealth

Think of home equity like a savings account you didn’t even realize you were growing. Paying off your mortgage and seeing your home appreciate in value builds wealth you can use later.

3. Helps When Selling Your Home

When you sell your home, the more equity you have, the more money you take home after covering the remaining mortgage balance and closing costs. This can be used for a down payment on your next house or other investments.

How to Build More Home Equity

If you want to increase your home equity, here are some smart moves:

1. Pay Down Your Mortgage Faster

The more you chip away at your mortgage, the faster you build equity. Consider:
- Making extra payments whenever possible
- Switching to biweekly mortgage payments (which results in an extra payment per year)
- Refinancing to a lower interest rate to pay off the loan faster

2. Increase Your Home’s Value

Since equity depends on market value, improving your home can boost both:
- Renovate key areas – Upgrading the kitchen or bathrooms can dramatically increase value.
- Improve curb appeal – First impressions matter. Landscaping and a fresh coat of paint can make a big difference.
- Keep up with maintenance – A well-maintained home retains value better in the long run.

3. Wait for Market Appreciation

Sometimes, just waiting can do the trick. If the market in your area is booming, your home’s value (and your equity) might rise without you doing anything.

Can Equity Be Higher Than Market Value?

Not exactly. Since equity is a percentage of market value, it can’t be "higher" than market value. However, you can have 100% equity if your home is fully paid off.

On the flip side, if your home’s market value drops below what you owe on your mortgage, you’re in negative equity (also known as being "underwater" on your mortgage). This situation makes selling or refinancing tricky.

Final Thoughts

Understanding the difference between equity and market value is critical for every homeowner. Market value shows what your home is worth in today’s market, while equity reflects how much of that home you truly own.

The more equity you build, the stronger your financial position becomes. Whether you’re selling, refinancing, or investing in your home, keeping an eye on both market value and equity ensures you make smart real estate decisions.