Define Free & Clear Equity
A homeowner's equity is the percentage of the property that he owns without any debts or liens placed upon it. In other words, it is the value of the home minus any debt.
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Significance
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Equity is the value of the home after all debts are subtracted. Therefore, it can be used by the borrower as collateral for a new debt, or as profit if the home is sold.
Function
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The larger the percentage of equity that a homeowner has in his home, the more profit he stands to gain from the sale of the home. The final goal of home ownership is to own the home free and clear.
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Types
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A homeowner could have built onto his original residence to increase his equity. He could have gained increased equity through rising real estate values or by paying off a portion of his debt against the home.
Considerations
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When a borrower looks to refinance his mortgage, the percentage of equity in the home plays a large role in his ability to qualify for the new debt.
Misconceptions
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The equity in a home does not have any tangible value until the homeowner goes to sell the property. Also, the home may or may not sell for its value, which could increase or decrease the homeowner's equity at the time of the sale.
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References
- Photo Credit Image by Flickr.com, courtesy of Casey Serin
