Welcome to Home equity
This is the market value of a homeowner's unencumbered interest in their real property—that is, the difference between the home's fair market value and the outstanding balance of all liens on the property.
Technically, home equity has a zero rate of return and is not liquid. Home equity management refers to 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.
The property's equity increases as the debtor makes payments against the mortgage balance, and/or as the property value appreciates. In economics, home equity is sometimes called real property value.
Home equity may serve as collateral for a home equity loan or home equity line of credit (HELOC). Many home equity plans set a fixed period during which the person can borrow money, such as 10 years. At the end of this “draw period,” the person may be allowed to renew the credit line. If the plan does not allow renewals, the person will not be able to borrow additional money once the period has ended. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed period, for example, 10 years.[1]
