What Does Equity Mean In Real Estate?

In the real estate context, home equity loans are a popular form of consumer debt, as financial publication Investopedia explained. By way of description, home equity loans can be called a few different names. These debts may also be called equity loans, home equity installment loans, or second mortgages. Despite the descriptor, this value is a key way that many American families help sustain themselves.

As Quicken Loans detailed, the value for home equity loans can increase in a couple of different ways. One such way is when a homeowner pays down his mortgage. The homeowner may also increase his equity by way of home value increases. At the same time though, a home's equity valuation can decrease when the home's value decreases at a swifter rate than the homeowner pays down his principal balance. In practice, home equity works by allowing homeowners to borrow against their homes' equity. To perform this calculation, the homeowner must subtract his home's current market value from the homeowner's mortgage balance due.

Home equity is of significant value for homeowners

Some factors that influence a home's market value include the property's location, size, broader market factors, so-deemed curb appeal (or first impressions), and future development prospects, as Rocket Homes detailed. 

As a matter of course, home equity loans usually have fixed interest rates. Because the rates are fixed, homeowners who sign on for such mortgages can expect for their interest rate to remain constant throughout the duration of their loan. On the other hand, home equity lines of credit tend to reflect variable interest rates (via Investopedia). Additionally, homeowners with a home equity loan can expect a lump sum while homeowners with a home equity line of credit can expect revolving lines of credit, a type of open-ended credit. As Capital One explained, open ended credit can be used and paid down -– so long as the account remains open and in good standing. For many American families, home equity is also a way that they subsidize college tuition, as U.S. News & World Report shared.