Calculating Equity in Real Estate Transactions

How do real estate transactions involve calculating equity?

How did Freda and Ben calculate their equity in their respective homes?

Answer:

The calculation of equity in real estate transactions involves determining the difference between the current market value of a property and any outstanding loans or mortgage on the property.

Equity in the context of real estate refers to the homeowner's ownership interest in their property. It is calculated by subtracting the total amount owed on the property, such as mortgage or loan balances, from the property's current market value. This calculation helps determine the homeowner's financial stake in the property and how much they truly own.

In the case of Freda, who bought her house for $150,000 in cash and it's now worth $250,000, her equity is the full market value of $250,000 as she doesn't owe anything on the property. On the other hand, Ben purchased his house for $100,000 with a 20% down payment and took a loan for the remaining amount. The value of his house has since increased to $160,000, and he has repaid $20,000 of the loan. In Ben's case, his equity is calculated by subtracting the remaining loan balance of $60,000 ($100,000 initial loan - $20,000 repayment) from the current value of his property, which is $160,000. Therefore, Ben's equity in his home is $100,000.