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{{short description|Market value of a homeowner's unencumbered interest in their real property}}
"Home equity' is the value of a homeowner's unencumbered interest in their property, i.e. the difference between the home's [[fair market value]] and the unpaid balance of the [[mortgage]] and any outstanding debt over the home. Equity increases as the mortgage is paid or as the property enjoys [[appreciation]]. This is sometimes called ''real property value'' in [[economics]].
'''Home equity''' is the [[market value]] of a homeowner's [[Encumbrance|unencumbered]] interest in their [[real property]], that is, the difference between the home's [[fair market value]] and the outstanding balance of all [[lien]]s on the property. The property's [[Ownership equity|equity]] increases as the debtor makes payments against the [[mortgage loan|mortgage]] balance, or as the property value [[capital appreciation|appreciates]]. In [[economics]], ''home equity'' is sometimes called '''real property value'''.<ref name="Odekon2015">{{cite book | author = Mehmet Odekon | date = 17 March 2015 | title = Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis | publisher = Routledge | pages = 554– | isbn = 978-1-317-47576-7 | url = https://books.google.com/books?id=q_FnBwAAQBAJ&pg=PA554}}</ref>


Technically, home equity has a zero [[rate of return]] and is not liquid. So-called ''home equity management'' is the process of using [[mortgage equity withdrawal|equity extraction]] via loans, at favorable and often tax-favored [[interest rate|interest rates]], to invest otherwise illiquid equity in a target that offers higher returns. This can be considered a form of [[arbitrage]].
Home equity is not [[Market liquidity|liquid]]. ''Home equity management'' refers to the process of using [[Mortgage equity withdrawal|equity extraction]] via [[loan]]s, at favorable, and often tax-favored, [[interest rate]]s, to invest otherwise [[Market liquidity|illiquid]] equity in a target that offers higher returns.


Homeowners acquire equity in their home from two sources. They purchase equity with their [[down payment]] and the principal portion of any payments they make against their mortgage. They also benefit from a gain in equity when the value of the property increases. Investors typically look to purchase properties that will grow in value, causing the equity in the property to increase, thus providing a return on their investment when the property is sold.<ref>{{Cite web |last=Martin |first=Allison |title=Home Equity: What Is It And How Can You Use It? |url=https://www.bankrate.com/home-equity/what-is-home-equity/ |access-date=2024-01-09 |website=Bankrate |language=en-US}}</ref>
Arbitrage is in essence borrowing money at one rate and earning a higher rate elsewhere. In home equity management, home equity is reduced, and the owner's [[liability]] is increased. Therefore, safety and liquidity are essential to preserving nominal home equity. Consequently, the process excludes all equity extraction that is actually spent or invested in non-liquid ways.

Home equity is frequently used as a form of collateral to obtain loans such as [[HELOC]] and [[home equity loan]]. Interest paid on such loans can be partially tax deductible in the United States and other countries.


Home equity may serve as [[Collateral (finance)|collateral]] for a [[home equity loan]] or [[home equity line of credit]]. Many home equity plans set a fixed period during which the homeowner can borrow money, such as ten years. At the end of this “draw period,” the borrower may be allowed to renew the credit line. If the plan does not allow renewals, the borrower will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, ten years.
==See also==
==See also==
* [[Equity]]
*[[Home equity loan]]
* [[Ownership Equity]]
*[[Ownership equity]]

* [[Home Equity Loan]]
==References==
{{Reflist}}


[[Category:Real estate]]
[[Category:Personal finance]]
[[Category:Personal finance]]
[[da:Friværdi]]
[[Category:Real estate]]


{{Realestate-stub}}

Latest revision as of 11:30, 30 May 2024

Home equity is the market value of a homeowner's unencumbered interest in their real property, that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increases as the debtor makes payments against the mortgage balance, or as the property value appreciates. In economics, home equity is sometimes called real property value.[1]

Home equity is not liquid. Home equity management refers to the process of using equity extraction via loans, at favorable, and often tax-favored, interest rates, to invest otherwise illiquid equity in a target that offers higher returns.

Homeowners acquire equity in their home from two sources. They purchase equity with their down payment and the principal portion of any payments they make against their mortgage. They also benefit from a gain in equity when the value of the property increases. Investors typically look to purchase properties that will grow in value, causing the equity in the property to increase, thus providing a return on their investment when the property is sold.[2]

Home equity may serve as collateral for a home equity loan or home equity line of credit. Many home equity plans set a fixed period during which the homeowner can borrow money, such as ten years. At the end of this “draw period,” the borrower may be allowed to renew the credit line. If the plan does not allow renewals, the borrower will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, ten years.

See also

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References

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  1. ^ Mehmet Odekon (17 March 2015). Booms and Busts: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis: An Encyclopedia of Economic History from the First Stock Market Crash of 1792 to the Current Global Economic Crisis. Routledge. pp. 554–. ISBN 978-1-317-47576-7.
  2. ^ Martin, Allison. "Home Equity: What Is It And How Can You Use It?". Bankrate. Retrieved 2024-01-09.