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.
Technically, home equity has a zero rate of return and is not liquid. So-called home equity management is 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. This can be considered a form of arbitrage.
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 Loan
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