How_Money_Works_-_The_Facts_Visually_Explained

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PERSONAL FINANCE

Wealth-building investments

Negative equity

If the value of a property falls, generally as the result of a real estate

slump, to the point where it is lower than the amount of loan owed on

it, then the property is said to be in negative equity, or “under water.”

$

$

$

Equity

As the mortgage is paid

down and/or the property’s

value increases, the level of

equity goes up.

LOAN

REPAYMENT

0 5

100

0

200

300

400

500

600

700

Negative

equity

VALUE OF PROPERTY

IN THOUSANDS OF DOLLARS ($)

YEARS OF OWNERSHIP

10 15 20 25

LOANS, VALUE, AND EQUITY

Equity fluctuates depending on the market value of a property and

the amount of any mortgage held against it. If a house is bought

for $500,000, with a loan of $400,000, the equity in it is $100,000.

If after five years, the loan has been paid down to $300,000, but

the value falls below $300,000, then the house is in negative equity

as the loan is greater than the market value.

Equity

Loan

$147,000 Loan

-$27,000 Equity

$160,000 Loan

$40,000 Equity

House value = $200,000

$80,000 decrease

in market value

$13,000 of loan paid

off over five years

New house value = $120,000

minus new loan value = $147,000

US_180-181_Home_Equity.indd 181 13/10/2016 16:20