Equity

In real estate, the term equity refers to the amount still owed on a house by the house owner or owners and the price the house would fetch if sold on the open market. Few people who purchase a house are able to pay it for it outright. The vast majority of new home owners go into debt in order to finance the house purchase. Typically, a mortgage is the debt instrument used. It is not uncommon for house prices to go on rising after the house has been purchased. In this case, the home owners know that they have an asset of greater value than their underlying debt. This situation is called positive equity and the financial confidence it inspires can be an important driver driver for consumer spending in an economy.

The opposite situation is called negative equity. This occurs typically during a housing market crash. Property prices plummet. Homes are sold on the market more cheaply than they were during the previous peak yet those who have already bought a home are locked into their previous commitment. They will already have incurred the debt to purchase the home and must go on making payments on it at the agreed rate.

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