Equity Basics

The word ‘equity’ is bounced around a lot in the finance sector. You’ve probably seen it most often in relation to your home, as in home equity, but also businesses and money matters in general. However, there is often confusion on the part of the consumer about what exactly equity is and since it’s such a common word now, very few people want to admit having a lack of knowledge about what equity actually is. However, this is a dangerous lack of knowledge because equity can help you out a lot, if you know what it is. What are the equity basics?

Equity in Simple Terms

Equity, quite simply in layman terms, the difference between how much a property is worth and how much has already been paid on it. The more you’ve paid on it, the higher the equity of your home because the amount of your equity loan is based on how much the home is worth, less the loan amount. So, if you have a $220,000 home and you have $90,000 left on it, you could get a loan of up to $130,000, though more likely you’ll get a percentage of this. This can be changed though based on the market and interest rates, etc.

Equity in business is also the difference between the value of the business and the claims of shareholders against it. So, a business may be worth five hundred thousand dollars and the claims are worth fifty thousand dollars, so the equity is worth four hundred and fifty thousand dollars. A home equity loan reduces the value of home however by putting a lien on it. Equity gets trickier than this though because it is based on the value of a home or business and this value can rise or fall depending on the economy, the market for such things, how much you’ve already paid off, and how much work you’ve put into it.

Other Definitions

Equity has other definitions as well. For example, equity can be a share of stock in a company or the assets someone has in a business or home after everything has been paid off. Generally though, equity means the difference between what something is worth and how much as been paid against it. This is where things like home equity or business equity loans come in. These loans allow you take out money against your home or business based on how much you’ve paid off. If you own your home or business completely, you can take out a percentage of how much it’s worth. Equity loans are considered to be safer than a credit card because the interest rate is lower since there is collateral for the bank to use against the consumer if he doesn’t pay up.

Equity is in short, a way to get money by either taking out a loan against a piece of collateral or by selling off shares in a company and having people buy them. These basics of equity will help you to decide if it’s for you or not.