Final answer:
Equity in a home is calculated by taking the fair market value and subtracting any debts owed. For Freda, with her house valued at $250,000 and no debt, her equity is $250,000. For Frank, with a house valued at $160,000 and a remaining debt of $60,000, his equity is $100,000.
Step-by-step explanation:
Understanding Home Equity
Equity in a home is calculated by subtracting the amount still owed on any mortgages or loans against the property from the current fair market value of the property. For instance, if Freda's house is currently valued at $250,000 and she does not owe any money to the bank, her equity is the full value of the house, which is $250,000. On the other hand, Frank's house is valued at $160,000, and he owes $60,000 on the mortgage (which was originally $80,000, reduced by the $20,000 paid off). Therefore, his equity would be $100,000, which is the difference between the current value and the debt owed.
Looking at the general trend, housing prices have indeed risen steadily over time. An example of this comes from FRED® Economic Data, where the median sales price for an existing one-family home was $122,900 in 1990, increasing to $232,000 by the end of December 2016. This represents an average annual increase of 3.1% in home prices, reflecting a general gain in home equity over time for homeowners.