Arizona Real Estate License Practice Exam

When a property appreciates in value, the increase in value directly contributes to the growth of equity. Equity in real estate is defined as the difference between the current market value of the property and the outstanding amount of any mortgages or liens against it. Therefore, as the market value rises, if the amount owed remains unchanged or increases at a slower pace, the equity increases as a result.

For instance, if a homeowner purchased a property for $300,000 and over time the property appreciates to $350,000 but the mortgage balance remains at $250,000, the equity would now be calculated as $350,000 (market value) - $250,000 (mortgage balance), resulting in $100,000 of equity. This demonstrates how appreciation positively affects equity.

The other choices do not accurately reflect the relationship between property value and equity. A decrease in equity or it remaining the same would not occur alongside an increase in property value, and while equity can indeed fluctuate based on varying market conditions, the primary and straightforward outcome of appreciation is an increase in equity.