What term refers to a claim on a property that diminishes the owner's equity?

The term that refers to a claim on a property that diminishes the owner's equity is "encumbrance." An encumbrance is a legal right or interest that a third party has in a property, which affects the owner's use and enjoyment of that property. This could be in the form of a mortgage, liens, easements, or other claims that impose certain restrictions or obligations on the property owner.

When an encumbrance exists, it reduces the overall value of the owner's equity because it signifies that there are financial or legal obligations attached to the property that must be satisfied before the owner can claim full ownership. For instance, if there is a mortgage on a property, the bank has a claim against it, which means the homeowner cannot consider the full property value as their own equity; they must account for the mortgage balance.

While a mortgage is indeed an encumbrance, not all encumbrances are mortgages, as there are various types that could impact property ownership differently. Liability refers to an overarching term related to debts or obligations but does not specifically address property claims, and an asset would indicate value rather than a claim or reduction of equity. Thus, encumbrance accurately captures the idea of a claim on a property affecting the owner's equity