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Financial Word of the Week: Equity

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FWOTW

What is equity?

Think of equity as a form of ownership. When you take out a secured loan to make a purchase, you obtain physical ownership of your purchase, but not full legal ownership. If you sold that purchase before fully paying off the loan, you would still need to pay off the rest of the loan. Equity is the difference between the value of that item and the amount still due on the loan.

For example, if your car is worth $20,000, and you owe $15,000, your equity is $5,000.

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So what does this mean for me?

For consumers, equity normally refers to houses, other real estate, and sometimes cars. Another way to think about equity is a fraction of ownership. When you first buy a home, your equity is approximately equal to the amount you put into your down payment. Over time, you pay down your mortgage and build equity in your home. Every payment you make lowers the amount owed to your lender and increases the amount you own.

How does this relate to a Home Equity Line of Credit?

A Home Equity Line of Credit, or HELOC (in the financial industry, we pronounce this “hee-lock,”) allows you to borrow using the equity in your home. Since HELOCs are revolving credit, they let qualified homeowners borrow money against the equity in their home whenever they need it. Because HELOCs are secured loans, they can provide credit at lower costs than unsecured loan, subject to the policy of the lending institution.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.