How_Money_Works_-_The_Facts_Visually_Explained

Home equity

The amount of equity in a home is a measure of a property’s

value. It is the realizable amount an owner could expect if,

after taking debts against it into account, a property was sold.

How it works

The equity of a property is calculated

by subtracting all debts incurred on

behalf of that property from its actual

value. The amount of equity rises as

the mortgage (loan) is paid down, and/

or the property’s value increases.

Financial institutions work out home

equity as a loan-to-value (LTV) rate,

which is arrived at by dividing any

remaining loan balance by the current

market value of the property. A low

LTV (less than 80 percent) is seen as

lower risk for further lending.

Positive equity

If the actual market value of a property is greater than

the amount of debt owed on it in the form of a mortgage,

then the property is said to be in positive equity.

$ 11. 9

trillion

US mortgage debt

at the end of 2008

$

$

❯❯Collateral A property or asset that a

lender will take if a borrower fails to

pay a loan.

❯❯Home equity loan A loan that uses

equity in a property as collateral.

❯❯Equity A property’s equity is equal

to the current value of the property

minus the outstanding loan amount.

NEED TO KNOW

Loan

As the mortgage is

paid down, loan-to-

value decreases.

$160,000 Loan

$40,000 Equity

$147,000 Loan

$153,000 Equity

House value = $200,000

$13,000 of loan paid

off over five years

New house value = $300,000

minus new loan value = $147,000

$100,000

increase in

market value

Equity =

house value - loan

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