Rising Home Equity Values
For most people, our homes are our biggest personal asset. That’s why when we hear that home equity is on the rise, we get excited about having a larger asset value. A higher net worth. As of late, multiple reports have shown that home equity is increasing. One report showed that after the end of the first quarter of this year, homeowner’s equity holdings amounted to $10.8 trillion nationwide. Note that this dollar figure is the highest it has been in nearly 7 years! Yet still below the $13.4 trillion mark reached in early 2006 when we had the housing bubble. With home prices projected to rise at about a 5 percent rate over the next year (according to one estimate by CoreLogic), that would mean that an extra 1.2 million homeowners would regain equity in their home.
Home Equity = Market Value of Your Home Minus Debt You Have on the Home (Mortgage)
With home equity on the rise, it still doesn’t solve the problem for many Americans that remain underwater on their mortgage. It is estimated that roughly 6.3 million homeowners nationwide are currently underwater. According to CoreLogic, the average mortgage is 33 percent more than what the home would sell for today with the average negative equity balance for one mortgage is about $52,000. While the homes that are primarily in negative equity positions are homes under $200,000 in value, many Americans have no option but to stay in their home until it returns to positive equity as they can’t afford to walk away or sell at a loss.
Everyone wants the ability to gain access to their home equity. Not only for their own financial peace of mind, but also to take advantage of a business opportunity, fix up their house or to use it throughout their retirement years. Transitioning from negative equity to positive equity is a big deal for anyone. Unfortunately, the transition is not in the homeowners hands. Each individual real estate market is unique and dependent upon a variety of factors for real estate prices to improve. Such factors include the local jobless rate, current real estate inventory on the market, crime rates, quality of local schools, the local economy and other neighborhood issues. On the national level, such factors include the national unemployment rate, gross domestic product (GDP) growth rate, inflation rate, building costs and 30-year mortgage rates.
What about home equity lending?
We had seen a large decline in the use of home-equity loans as housing prices dropped and the equity that many had in their homes moved to negative levels. Recently, home-equity lending has made a comeback as more and more people are seeing equity levels increasing in their homes and they feel more comfortable about borrowing against the value of the home.
Back in the 2006 pre-recession period, the peak of home equity lending hit a high of $430 billion compared to an estimated $92.5 billion in 2013. A lender will typically only want an 80% loan-to-value ratio before the home-equity loan is concluded. What this means is that to qualify for a home-equity loan you will have to have at least 20% ownership (positive equity) in the home. Some lenders have specific minimums for lending on a home-equity loan ranging from $20,000 to $25,000 while you may be able to find some financial institutions willing to loan down to $10,000.
There are two different types of home equity loans. A standard home equity loan is where you are able to borrow a single lump sum. This is a good option if you have a specified repair project on the home or want to borrow the equity in your home to purchase a car, etc. The home equity loan may be fixed or an adjustable rate and may be repaid up to a 30-year term. Whereas, the second type of home equity loan is a home equity line of credit or more commonly called a HELOC. This type of loan allows you to borrow smaller sums as needed up to a specified fixed amount. A HELOC is common if you are doing home improvements over time, starting a business or just need the added assurance of having extra funds available at certain times. You only pay interest on the amount borrowed but there are some loopholes such as having to pay an annual fee as opposed to initial closing costs up front. Interest rates are also typically adjustable for this kind of loan meaning that you ride the market as opposed to having a fixed interest rate. Another note is that regardless of which type of home equity loan you choose, it is still considered a recorded mortgage.
Just remember that the equity you have in a home is achieved over time. It’s not acquired overnight. Home prices remain stable and in some areas are seeing good increases in value. R
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