May 31, 2022
How soon do you need to start thinking about home equity? Believe it or not, you start making decisions about equity right away in the planning and saving process of your loan.
How? The amount of money you save for a down payment is a decision that directly affects the amount of the loan you want. The bigger your down payment, the more potential equity you could start out with.
Essentially your home’s equity is the difference between the current market value of the home and how much you owe on the mortgage. That’s one reason why a bigger down payment affects your equity–you’ll start out owning the mortgage amount minus that money down.
Since the equity in your home is subject to change, it’s important to pay attention to the forces that can alter that amount. When property values rise, your equity potentially rises, too. That gives you more borrowing power for a cash-out refinance, for example.
If you assume property values are stable, it may take around five years of consistent payments to see an appreciable gain in your home’s equity. But if housing markets are rising, that timetable could be altered.
When property values are falling, the inverse is true but you shouldn’t panic and sell or refinance the home just because the numbers are dropping at the moment. Housing market booms and housing market slumps are cyclical, and some borrowers simply choose to ride out the lows and wait for the highs.
Not all homeowners have the luxury of being able to wait to sell or refinance but it helps to make the most informed choice you can when comes to housing market trends.
In a housing market where values are slumping, remember that your equity may be affected but the amount of your loan has not increased.
It’s a matter of comparing what you still owe to how much the home is worth in the current market, slumping or not.
A bigger down payment helps you build equity faster. So can making two payments a month or overpaying on your mortgage.
It’s not just about knowing the value of the home or how long it will take to pay off. You may wish to apply for a cash-out refinance loan at some point, and the equity in your home will be an important factor in that transaction. The same is true for any refinance loan that requires a credit check and appraisal.
The most accurate way to determine your home’s current value is to have it appraised, but you should expect to pay hundreds of dollars for this service. It may be better for those who just need a rough idea of how much the house is currently worth to examine online real estate sites to see what homes like yours might be selling for in the local area.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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