When you get a loan, you have to take into account a range of things: interest rates, exit fees, being in debt, having bad credit, etc. But one thing that people forget about is the home equity.
Life can be tough, especially when we’re talking about money. Even so, you can’t mess around with home equity. If you know how it works, it can benefit you. This article is a brief guide on this subject. We’ll try to answer the most commonly met questions. Let’s start – shall we?
What Is Home Equity?
When you get a new home, it has a particular value, a market value. You will have to pay an amount in the form of a home loan for that property. Home equity is the difference between the market value of your property and the amount that remains to be paid for your home loan.
How Can Home Equity Benefit Me?
Home equity can help you whenever your property’s market value rises. For example, if the market dictates that your property is worth more, you can use the difference (the home equity) and invest in your home or purchase other things.
For example, your property’s market value is one million dollars. Your mortgage is five hundred thousand dollars; therefore, the value of your home equity is at five hundred thousand dollars. But if you want to access that equity, expect to get less.
For home equity, it would be something like an eighty percent of the total market value of your property. That means you will get three hundred thousand dollars in home equity, give or take. It depends on your lender and other factors related to the market value of your property.
Why Do I Lose Home Equity?
Not being properly informed about the ways in which you can lose your equity could be risky for you. What may appear like a harmless thing could often turn into a severe issue.
On that note, home equity can drop in value because of certain factors. For example, the market can fluctuate in a manner that can quickly make your house and other houses from that area drop in value. What once was estimated at one million dollars, now may value nine hundred thousand dollars instead.
Other factors like high-interest rates or maybe not renovating your property can also have an adverse impact on your home equity. This is why you may end up paying more than you signed for.
Another way in which you can lose your home equity is by changing the structure or layout of the home. One thing is for sure: not all home enhancement projects are done adequately. Making a rushed decision such as turning a garage into a room or painting all the rooms in the house red could make you lose your equity.
The list of scenarios goes on: you could also lose your home equity if you refinance a home loan by taking out cash. In other words, considering that you would get cash on a refinance, the overall value of the loan will increase. So, if the value drops or depreciation doesn’t keep up, you could end up owing more than the actual value of the home, which would result in losing your home equity.
Choosing to borrow on a home equity loan might also be linked to unwanted consequences. To put it roughly, when you decide on taking out a home equity loan, you renounce your equity to financing. Your equity diminishes as the financed loan increases. Evidently, considering that you intend to use the equity loan in order to remodel your master bedroom or bathroom, you could replace the equity you lost.
If the demographics in your neighbourhood changes, this could also impact your equity. For example, if your neighbourhood is often visited by criminals and thieves, this could imminently drop prices and negatively affect ownership. So, if house prices fall, your equity will decrease, too.
How Can I Avoid Negative Home Equity? How Can I Improve It?
If you already signed a contract that has no option regarding a negative home equity guarantee, you cannot avoid it. You can switch loans, but that will require an exit fee plus five percent of the value of your new home. However, you can avoid this situation if you do some research before signing any contract.
By that, we mean you can get a no negative home equity guarantee option in your contract. This way, if your property’s market value decreases, it won’t affect your payments. However, you should renovate your home and pay your taxes on time. By doing this, your home equity will remain positive.
So, if you don’t want to lose home equity, it’s time to pay your taxes on time and invest some money into your property. This way, you’ll maintain your house’s market value. You can opt for the services of NSW Mortgage Corp if you are in danger of losing your equity. We will tell you everything you need to know and will offer you solutions to prevent any issues from arising.
