ShmoopTube

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Finance a la Shmoop what is equity well its ownership that's

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what here's equity here's equity and here's [Vehicle with a paid sticker on the windscreen]

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equity this is your equity in the pie your share of ownership your one

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ten-millionth ownership of whatever dot-com which just went public example

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you buy a home for 500 grand putting down a hundred thousand dollars and [Chalkboard with price of a home in front of a house]

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taking out a loan or mortgage of four hundred grand over the next eight years

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you pay down that mortgage to be just three hundred grand and in the mean time [A payment chart graph]

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the value of your house has grown to seven hundred grand

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someone actually knocks on your door and offers to pay you that much in cash that [Man knocks on door and offers to pay for the house]

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day all right what's your equity ownership in the house worth well you

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have seven hundred grand as the price of the thing you own you have three hundred

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grand in loans against it so if you sell you have to pay back the loans generally

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speaking and you're left with four hundred grand as the value of the equity

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you have in your home so let's spin things differently instead of the bank [A number wheel spinning]

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loaning you debt money to buy your home the bank decides to partner with you as

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[Bank shakes a womans hand] a co investing equity player well together you buy a condominium for 250

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grand with you putting down 100k and the bank putting down 150 K both in equity

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time passes tick tick tick and you sell the condo a decade later for $500,000 [Woman sells condo for $500,000 and hands over apartment]

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okay now who gets what well now the bank was your equity partner instead of your

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debt partner or lender so when you bought the condo you owned a hundred

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divided by 250 of it or 40% and the bank owned a hundred fifty over 250 of it or [Woman doing math calculations on a chalkboard]

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60% nothing changed your ownership stakes remained flat at forty sixty so now

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at 500 K you sell and you keep 40 percent or two hundred thousand dollars

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and the bank keeps sixty percent of five hundred K or three hundred grand and you [Woman and bank stand as dollar signs fall from the sky]

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both doubled your money and note the power of debt or leverage in this model

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had the bank loaned you the 150 K as debt instead of being your equity [Bank hands money to woman]

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partner you would have probably paid off $50,000 or so of that loan in the ten

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years you had it so you'd owe a remaining hundred

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thousand dollars but you'd have sold it for the same five hundred grand and

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after paying off the loan you'd have four hundred thousand dollars in your

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pocket instead of two hundred thousands and yes there were interest payments

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that went along the way as well as upkeep and risk and other things but in [Interest payments of 351,000 dollars on chalkboard]

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theory you could have rented the home and hopefully you'd have broken even in

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rational real estate rental market sorry we usually don't put that much math in [Lots of numbers on a pie as girl takes a slice]

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our pie

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