Final answer:
Equity is the value of an asset owned by an individual after subtracting any debts associated with that asset. It represents the owner's initial claim of value in the property. Examples include home owners calculating their home equity by subtracting outstanding mortgage amounts from the market value of their homes.
Step-by-step explanation:
Understanding Equity
Equity represents the portion of ownership that a person has in an asset, such as a house, after subtracting any debts associated with that asset. In the context of home value, equity is the market value of a house minus the amount still owed to the bank. For instance, if Fred's house is valued at $200,000 and he owes $180,000 to the bank, his equity in the house is $20,000. This equity represents Fred's initial claim of value in the property.
In another example, Freda's house is valued at $250,000, and because she owes nothing to the bank, her equity is the full market value of the house, amounting to $250,000. Similarly, if Frank's house is valued at $160,000 and he has $60,000 remaining on his mortgage, his equity is $100,000. Equity is an important concept in finance as it influences decisions related to buying, selling, or refinancing property.