Home equity

Home equity is the value of a homeowner's unencumbered interest in their property, that is to say 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.

Technically, home equity has a zero rate of return and is not liquid. Home equity management is the process of using a equity extraction via loans, at favorable and often tax favored interest rates, to invest otherwise idle value in higher yield (after tax), liquid, safe, way to create an arbitrage. Arbitrage is in essence borrowing money at one rate and earning a higher rate elsewhere. Note that home equity management actually reduces home equity, so that safety and liquidity are essential to preserving nominal home equity. Thus 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 low interest loans such as HELOC and Home Equity Loans. Interest paid on such loans can be tax deductible in the United States.