How Much of Your Net Worth is in Your House?
By Kathy Genz, CRS CDPE GRI QSC SRES, Broker Associate, RE/MAX Properties
Over the past 3 years, many people have seen appreciation in their homes disappear because of declining values. If they bought the home during the past 3 years, they may now owe more on their mortgage than the home can currently be sold for. Since people buy homes expecting them to go up in value, what should current homeowners and those thinking of buying do? Do they sit tight or do they move forward?
That is one of those questions where the answer is "It depends." For long time homeowners, the current situation may be more an inconvenience and annoyance than anything else. They have been in their home long enough to have appreciation that has stayed mostly intact in our local market throughout the real estate meltdown. Other markets have not fared nearly as well. The big question is whether they have left that appreciation alone, or whether they have a high loan to home value ratio (LTV) because of refinancing during a period of low interest rates and having taken money out of their home for other things - investments, other real estate, home improvements, cars, boats, RVs, vacations, medical bills, other bills, and many other reasons. Some of these are reasonable uses of home equity, but others may have been unwise choices that pushed homeowners into a situation where they can't sell their home without bringing cash to closing or unless they qualify for a short sale where the bank agrees to take less at closing than the borrower owes.
As a former financial advisor, I often heard the question: Should I pay off my mortgage? At a time when interest rates and investment returns were high enough (6% and higher) that the homeowner could make more money by investing the money they would use to pay off the mortgage elsewhere rather than paying off their mortgage, the answer was often no. In the current market, where interest rates on savings are less than 1% and interest rates are still 5 times that or more, it might make more sense, if a homeowner has the desire and available cash to pay it off. Even newer homeowners have an opportunity to gain equity in their homes by paying down their mortgages with extra principal payments monthly or as often as they are able to add an extra amount to their payment. Every extra dollar increases equity.
There are many sources of mortgage calculators on the internet that can help you determine what effect additional payments will have on your loan balance in 2 years, 5 years, 10 years, even the life of the loan. Making a double principal payment monthly will knock years off the life of the loan. The more often payments are made, the faster the acceleration. The more extra principal paid, the faster the acceleration. Compounding starts working in a homeowner's favor as more of each payment becomes principal rather than interest to the lender. You can use the mortgage calculator on my website to try different payment scenarios. The result is that even in a down market, and especially in a down market, you can gain equity in your home by paying down your loan, which could make a big difference in your ability to sell your home when that time comes. And when the real estate market appreciates once again, you will be in much better financial condition, which could allow you to make a great choice on your next purchase because you will have money from both principal reduction and appreciation. That's a pretty good feeling.
So how much of your net worth is in your house? If it isn't much now or you owe more than your house is worth and you plan to stay put, make a plan to improve your equity position by trying these suggestions. Homeownership is still the best way to create wealth for many Americans. If you want to know if the current market is the right one for you to sell and/or to buy that new home, give us a call. We'd love to help whenever you are ready!
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