Washington State Real Estate Practice Exam

Which of the following is an example of a benefit of home equity?

1. It increases property taxes

2. It can be used as collateral for loans

3. It decreases the overall market value

4. It generates rental income

The correct answer is: It can be used as collateral for loans

Home equity represents the difference between the current market value of a property and the amount owed on any mortgages secured by that property. One of the significant benefits of home equity is that it can serve as collateral for loans. When homeowners need funds for various reasons—such as home improvements, education expenses, or debt consolidation—they can leverage this equity to access potentially lower interest rates compared to unsecured loans. Using home equity as collateral makes it easier for homeowners to secure loans, as lenders view this as a lower risk. This benefit illustrates the financial flexibility that homeowners can gain as they build equity in their properties. The ability to draw on this equity may also facilitate better financial planning and investment opportunities. Other choices do not highlight the advantages associated with home equity. Increasing property taxes typically arises from improved property value rather than a benefit; a decrease in overall market value directly negates the positive aspects of home equity, and rental income relates to investment properties rather than the concept of equity in a primary residence.