What does equity represent in real estate?

Equity in real estate refers to the ownership value that an individual has in a property, calculated as the fair market value of the property minus any liens or debts against it, such as mortgages. This means that equity reflects the portion of the property that is truly owned by the homeowner, without any obligations to lenders or other claims.

When considering the fair market value, it represents what the property is worth on the open market. Liens, including any mortgages or second mortgages, are amounts owed that deduct from this value. Therefore, when you subtract these outstanding debts from the fair market value, you arrive at the equity, which indicates how much of the property’s worth is available to the homeowner.

In the other options, the total cost of the mortgage does not account for the property’s current market value and does not determine ownership. The value of the land only ignores any structures or improvements made to the property, as equity considers the full property value, including both land and buildings. Finally, the amount of cash a buyer has in savings is unrelated to real estate equity since equity is specifically tied to the property value in relation to any debts, not personal savings.