Home equity represents the market value of a homeowner’s unencumbered interest in their real property—to be precise; it is the difference between the home’s fair market value and the outstanding balance of all liens on the property.
The property’s equity will rise as the debtor make payments against the mortgage balance, or/and when the value of the property appreciates. In economics, home equity is also refereed as real property value.
In theory, home equity carries a zero rate of return and it is not regarded as a liquid asset. Home equity management is a process where equity is raised via loans—at favorable, and often tax-favored, interest rates—to invest otherwise illiquid equity in a target that offers higher returns.
Home owners obtain equity in their home from two sources. They get the equity with their down payment, and the principal portion of any payments they make against their mortgage. They also stand to gain in equity when the value of the property appreciates. Investors usually consider buying properties that will leap in value in due course of time, thus making the equity in the property to rise, and also provides a return on their investment when the property is sold.
Home equity can also serve up as collateral against a home equity loan or home equity line of credit (HELOC). Many home equity plans pre-fix a timeframe during which the borrower can borrow money, for example, 10 years. After the end of this “draw period,” the borrower is allowed to renew the credit line. Should the plan restrict the renewals, then the borrower will not be able to borrow additional money once the period has got over. Whereas some plans may require payment in full of any outstanding balance at the end of the period, others may let the repayment done over a fixed period, for instance, 10 years period.