How Can You Find out How Much Equity You Have?
What is Equity?
When financial advisors say that homeownership is a good investment, they are referring to the value that your home gains over time. This value is called home equity. Home equity is the difference between the amount you may still owe on your mortgage and what your home is worth.
Equity is important for several reasons. In addition to being a measure of the hidden wealth you have in your home, it is also an asset you can tap when the need arises, and protection against losing your home should you suffer a financial reversal. Almost all experienced home buyers use the equity in the home that they are selling to make a significant down payment on the home they are buying, making it possible to move up to a more expensive home. Many owners use equity to help finance their retirements, pay their children’s college tuition or student loans, deal with a financial crisis, or leave an estate to their heirs.
Homes that are worth less than their mortgages are considered in “negative equity” or “underwater,” which makes their owners susceptible to default should they fail to meet their mortgage payments. Following the crash in home values, by the end of 2009 one in four homeowners were underwater. By the end of 2016, after four years of recovery, only about 9.6 percent of all U.S. properties with a mortgage were considered seriously underwater, and 24.6 percent were “equity rich,” or worth more than 50 percent of their loan amounts.
What is My House Worth?
Finding out how much you owe on your mortgage is easy. Just look at your monthly statement for the remaining principal. Finding out the value of your home is much trickier.
The adage “a home is worth what someone will pay for it” is not entirely accurate. Sometimes buyers pay too much for a home and spend years paying off a mortgage that’s bigger than it should have been. This condition, called “house poor,” often occurs in multiple bid situations where several buyers are competing for the same property. It can also happen when a buyer using a mortgage to finance his offer is competing against another buyer paying all cash. Sellers often prefer the all-cash offer since there is no risk that the mortgage will fall through, causing the buyers using a mortgage to bid more than the house is worth.
Buyers who are lucky or smart may also buy a house for less than it is worth. “Cash for houses” companies do this all the time by offering less than a home’s value in return for no agent commission and a fast sale. Investors who buy homes to “flip” them or rent them out also are expert at finding good deals.
Many websites, including Homes.com, offer useful tools to help buyers and sellers value properties. These are called “AVMs,” or automated valuation models, and they provide estimates of current values based or recent sales of comparable homes. They are good starting points for consumers to get a general idea of a home’s value and whether it is appreciating or depreciating. However, AVMs are limited in their accuracy and cannot look inside a home to see if it has been well-maintained or know if it has had any additions or improvements since the last time it was sold.
In the final analysis, a home is worth only what a licensed appraiser says it is. Appraisers are trained professionals with access to the best valuation data which follow standard protocols when making an appraisal. They tour the home and review all the documentation about it, including past appraisals and sales. Lenders require appraisals so that they make their loans based upon the actual value of the home, rather than the price agreed upon by a seller or buyer. Should the agreed upon price exceed the appraisal, the lender will finance only the appraised amount, and the deal may fall through unless the seller and buyer agree on a lower price.
Homeowners tend to think their homes are worth more than they are. In February 2017, for example, owners refinancing their homes believed their homes were worth 1.69 percent more than their appraisals—or more than $5000 for a $300,000 home. If you are thinking about selling or refinancing your home and want an accurate valuation, have an appraisal done. Not only will it help guide your decision, but it will also go into the database of valuations other appraisers will use when the appraise your home for a refinancing or to finance your buyer.
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Happy house hunting!