Hawaii Pre-Licensing National Practice Exam

What do we call the difference between the value of a property and the total amount of liens against it?

1. Equity

2. Net worth

3. Loan-to-value ratio

4. Cash flow

The correct answer is: Equity

The term that describes the difference between the value of a property and the total amount of liens against it is equity. Equity represents the homeowner’s interest in the property, essentially reflecting how much of the property is owned outright versus what is owed to lenders. When the market value of a property increases, equity typically increases as well, assuming the amount owed on the liens does not increase at the same rate or more. In contrast, net worth refers to the total assets minus total liabilities of an individual or entity, which is broader than just the equity in a single property. The loan-to-value ratio measures the amount of the mortgage compared to the property’s value but does not directly reflect the owner's equity. Lastly, cash flow refers to the income generated from an investment property after all expenses, which also does not address the relationship between property value and liens. Thus, equity is the most accurate term to define the specific relationship indicated in the question.