Term Of The Day: Equity
For a home buyer, equity is the difference between the current market value of his home and the amount of money he owes the lender on his mortgage loan.
PropTiger Explains Equity
If you own a home worth Rs 5,000,000 and if you owe Rs 2,500,000 to the bank that extended a mortgage loan to you, your home would represent an equity of Rs 2,500,000. Every month, when you pay back your home loan in equated monthly installments, your equity rises. But, the equity your home represents rises when the value of your home rises too. This is true when you renovate your home too. But, if the loan principal amount rises, the equity your home represents will fall.
Real estate prices fluctuate frequently. The amount of money you owe the bank changes often too. So, the equity your home represents frequently fluctuates. The difference between equity in the context of real estate and business is that in real estate, assets are revalued periodically, while the assets owned by a firm are not. For example, the value of the home you own is revalued periodically, but the machinery owned by a firm is not.
Equity is often confused with capital gains. But, capital gains is the increase in value of your asset while equity is the difference between the value of your asset and the amount your lender had financed.
Check out PropGuide's comprehensive guide to real estate terms here.
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