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Home equity represents a household's ownership stake in their property. It is calculated as the current market value of the house minus the outstanding balance of the mortgage loan. On a household's balance sheet, the house is an asset and the mortgage is a liability; home equity is the resulting net worth associated with the property.

Home Equity

A household's equity in their home is highly sensitive to changes in property values. This is because the mortgage debt is a fixed nominal amount, while the value of the house (the asset) fluctuates with the market. Consequently, any rise or fall in house prices directly translates into a corresponding increase or decrease in the household's home equity.

Fluctuation of Home Equity with House Prices

A family owns a home with a current market value of $450,000. They have an outstanding mortgage loan balance of $300,000 on the property. What is the family's equity in their home?

Two households, A and B, each have exactly $100,000 in home equity. However, their financial situations are different. Analyze the information provided below and determine which household is in a more financially vulnerable position if local property values were to suddenly decrease by 25%. Explain your reasoning.

Analyzing Household Financial Positions

A household's balance sheet lists their house as an asset and their mortgage as a liability. In your own words, explain how these two components are used to determine the household's equity in the property.

Explaining Home Equity Components

A homeowner makes regular mortgage payments for one year, reducing their outstanding loan balance. During that same year, the market value of their house falls by an amount that is greater than the total principal they paid down. Based on this information, the homeowner's equity in their property has increased.

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