Equity is what you actually own after subtracting what you owe. The formula is the same everywhere it appears: total assets minus total liabilities. A homeowner with a $400,000 house and a $250,000 mortgage has $150,000 in equity. A company with $5 million in assets and $3 million in debt has $2 million in shareholder equity. A partner in a private business has an equity stake worth the business’s net value multiplied by their ownership percentage. The number moves whenever asset values change or debts are paid down or added.
Home Equity and How It Moves
Home equity is the gap between what your home is worth today and what you still owe against it. A professional appraisal sets the value by comparing recent sales of similar properties and the condition of the home itself. The debt side includes your remaining mortgage principal plus any other liens on the property, such as a second mortgage or a court judgment.
Payments aren’t the only thing that builds equity. Rising values in your neighborhood can add to it without you doing anything, and falling values can wipe out years of payments. Owe $200,000 on a home that appraised at $350,000 last year and $300,000 this year, and your equity dropped from $150,000 to $100,000 even though every payment landed on time.
When you sell, outstanding liens get paid first from the proceeds and whatever is left belongs to you. That right survives foreclosure: surplus funds after the lender and any junior lienholders are paid are yours to claim, but you generally have to file with the foreclosure trustee or court clerk, and deadlines vary. Unclaimed money eventually transfers to the state’s unclaimed property division.
If you want an exact figure for what you’d need to pay off the mortgage, federal law requires your servicer to send an accurate payoff balance within seven business days of a written request.1Office of the Law Revision Counsel. 15 USC 1639g – Requests for Payoff Amounts of Home Loan That number will run slightly higher than the principal shown on your statement because it includes accrued interest and fees.
Borrowing Against Home Equity
Two products turn home equity into cash. A home equity loan pays out a lump sum at a fixed or adjustable rate with a set repayment schedule. A home equity line of credit (HELOC) works like a revolving credit line you draw from as needed, usually at a variable rate. Both sit behind your primary mortgage as second liens.2Consumer Financial Protection Bureau. What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?
Most lenders want you to keep 15% to 20% of the home’s value as a cushion, which caps the combined loan-to-value ratio at 80% to 85%. On a $400,000 home with $250,000 owed on the first mortgage, an 80% cap leaves room for about $70,000 in additional borrowing ($400,000 × 80% = $320,000, minus the $250,000 already owed).
Closing costs apply. Home equity loans typically bring origination fees, appraisal fees, title searches, and recording charges. HELOCs may add annual fees and inactivity fees. Federal rules require lenders to disclose every fee, the risk to your home if you default, and the conditions under which the lender can freeze or reduce your credit line.3Consumer Financial Protection Bureau. Regulation Z – 1026.40 Requirements for Home Equity Plans A HELOC lender can cut your credit limit if your home value drops significantly, which is exactly the moment you’d most want the money.
Interest on either product is deductible only if you use the borrowed funds to buy, build, or substantially improve the home securing the loan. Spend the money on credit card debt, a vacation, or tuition, and the deduction is gone.4Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction The mortgage interest deduction applies to the first $750,000 of combined mortgage balances ($375,000 if married filing separately) for debt taken on after December 15, 2017. Older debt follows a $1,000,000 limit.5Internal Revenue Service. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses) 2 The One Big Beautiful Bill Act, signed July 4, 2025, may affect these thresholds for 2026, so check current IRS guidance before claiming the deduction.
Shareholder Equity in a Company
Shareholder equity is the book value of a company: the amount that would theoretically remain for investors if every asset were sold and every debt paid. Three pieces make up most of the number.
- Common stock, meaning money raised by issuing shares to the public. Common shareholders usually get voting rights on major corporate decisions.
- Preferred stock, a class of ownership that typically carries a higher claim on assets and dividends but gives up voting power. In a liquidation, preferred shareholders get paid before common shareholders.
- Retained earnings, the profits a company kept rather than paying out as dividends. Over years of profitable operations this often becomes the largest slice of total equity.
Book value and market value rarely match. A stock price reflects investor expectations about future earnings, brand strength, and growth. Book value only captures what’s on the balance sheet at historical cost. A technology company with $10 billion in shareholder equity might trade at a market capitalization of $200 billion because investors are pricing in profits that haven’t happened yet.
Return on Equity and Buybacks
Return on equity (ROE) is the most common way investors judge how efficiently a company deploys shareholder capital. Divide net income by average shareholder equity for the period and express it as a percentage. A company earning $50 million on $500 million in equity posts a 10% ROE. Consistently high ROE suggests management turns invested capital into profits well.
When a company buys back its own shares, those shares become treasury stock and are subtracted from total shareholder equity. The company spends cash (assets fall) to reduce equity by the same amount. A company with $1.5 billion in equity that uses $200 million on repurchases ends up with $1.3 billion in equity. The buyback doesn’t create new value; it shrinks the pie and gives each remaining shareholder a larger slice of a smaller one. Earnings per share rises mechanically because the same profits divide across fewer shares, which is why some investors treat EPS gains driven by buybacks with caution. Heavy buybacks can also inflate ROE by shrinking the denominator, so the metric works best alongside other measures rather than alone.
Equity in a Private Business
Ownership in a private company follows the same math but almost none of the same mechanics. There’s no ticker symbol and no exchange price. The operating agreement (for an LLC) or partnership agreement governs how ownership is divided, what each stake is worth, and what happens when someone wants to sell or leave.
Owners get their stakes through capital contributions, and those contributions aren’t always cash. Sweat equity, meaning ownership earned through labor, expertise, or intellectual property rather than a check, is common in startups. A developer who builds an entire platform might receive a 30% stake in place of a salary, usually with conditions written into the agreement, such as staying with the company for a set period.
Valuation is messier without a market price. A common approach applies a multiple to earnings before interest, taxes, depreciation, and amortization (EBITDA). If comparable businesses sell for six times EBITDA and yours generates $2 million, enterprise value lands around $12 million. Subtract debts to get total equity value, then multiply by your ownership percentage. Multiples vary widely by industry, size, and growth. Most operating agreements name a valuation method for departures and disputes, which is worth negotiating before it matters.
Negative Equity
Negative equity means you owe more than the asset is worth. A car buyer who finances $30,000 has negative equity the moment the vehicle becomes “used” and its resale value drops below the loan balance. Homeowners hit the same condition when property values fall, sometimes described as being underwater.6Federal Trade Commission. Auto Trade-ins and Negative Equity: When You Owe More Than Your Car Is Worth
With a car, the problem shows up at trade-in. If the vehicle is worth $15,000 and you owe $18,000, you have to cover the $3,000 gap. Many dealers will roll the shortfall into your next loan, which starts you underwater on the new vehicle and makes the cycle harder to break.
For homeowners, a short sale is one exit. You sell for less than the mortgage balance with the lender’s approval, and the lender takes the reduced proceeds rather than pursuing a full foreclosure. Whether the lender can still collect the remaining balance (a deficiency) depends on state law and what you negotiate. Some states prohibit deficiency judgments after a short sale; in others, you need the lender to waive the deficiency in writing. Forgiven mortgage debt may also count as taxable income. A federal exclusion for forgiven principal residence debt applied to discharges before January 1, 2026, and has expired for debts discharged afterward unless Congress renews it.7Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
On a corporate balance sheet, negative equity means liabilities exceed assets. That doesn’t always signal collapse. Some profitable companies carry negative book equity for years because of large buyback programs. It does mean creditors have more claims than the company’s assets can cover.
Protecting Home Equity in Bankruptcy
Filing for bankruptcy doesn’t automatically mean losing your house. Federal law lets a debtor shield a certain amount of equity in a primary residence through a homestead exemption. Under the federal schedule, a debtor can protect up to $31,575 of equity in a home or other property used as a residence.8Office of the Law Revision Counsel. 11 USC 522 – Exemptions That figure was last adjusted in April 2025 and holds until the next adjustment.
Most states offer their own homestead exemptions, and many are far more generous than the federal amount. Some allow debtors to exempt several hundred thousand dollars; a handful offer unlimited homestead protection. Debtors in most states choose between the federal schedule and their state’s version, picking whichever better protects their assets. That choice is one of the most consequential in any bankruptcy filing, and it turns entirely on how much equity you hold and what else you need to shield.