Posted by Arjun Dhingra
Now that you have your Bay Area home/condo, how do you protect this asset and ensure its continued value increase? For most all homeowners, this large indebtedness is is a major piece of pie in their financial picture and outlook for the long term/eventual retirement. Aside from aggressively paying down your mortgage’s principal balance, though, you’re unsure of how to get it. The good news is that there are several ways your home equity can increase, aside from making extra payments on your mortgage each month. Home equity is wealth and, for many U.S. households, equity in a home (or homes) represents the largest percentage of their total net worth. Building wealth through real estate is how many people build their retirement nest egg. It’s why financial experts often recommend buying a home instead of renting one; and, why homeownership has always been considered part of the American Dream. Since 2012, home values have climbed by more than 30% in San Francisco which has increased Bay Area homeowners’ net worth by millions of dollars.
So what is “home equity,” for starters? Home equity is a financial term. It’s the difference between how much your home is worth, and how much is owed on your home.
If your home’s value is $950,000…
And your current mortgage balance is $750,000…
You hold $200,000 in home equity.
As a Bay Area homeowner, it’s difficult to know precisely the amount of home equity you hold on any given day. It’s often a guess or a feeling. You can never know your home’s exact value without a home appraisal. There are two notable exceptions, however. On the day your purchase your home, your home equity is equal to your downpayment. The other exception is when you have your home appraised for either a home loan refinance or for personal reasons, such as estate planning. Home appraisals are meant to determine your home’s fair market value. The difference between this value and the amount owed is your home equity.
NOTE: Certain refinance programs, including the FHA Streamline Refinance and the VA Streamline Refinance, don’t require a home appraisal.
Home equity is an asset, and building your assets builds your personal wealth. For many people, this is reason enough to manage home equity closely. However, home equity provides additional homeowners benefits, too. Notably, because home equity is “dollars on paper,” it can be borrowed against — often at low costs. Home Equity Lines of Credit (HELOC) and Home Equity Loans (HELOAN) are two common tools through which homeowners can borrow against their equity; and, with current mortgage rates low, the cash-out refinance has re-emerged as a popular home equity-accessing tool in the Bay Area market. As of late, our team has helped homeowners in this market use their equity to pay for college expenses, to start a business, to remodel their home, or to consolidate credit card debts. Some have also used their home equity to purchase additional homes for their personal use, or for investment – specifically in strong rental markets like Oakland and even up in the wine country (Napa/Sonoma).
Overall, there are 3 main ways in which your Bay Area home can increase its equity position.
1) Your property value rises because of market forces
When home values rise, home equity is created and, according to the government, home values have climbed close to 9% since last year, on average, Bay Area wide. If you own a home, you may have more home equity than you realize. Online tools can help you find your home’s approximate value, or you may just want to commission an appraisal — especially if your current loan requires mortgage insurance, or is backed by the FHA. It’s common for homeowners to cancel FHA MIP once they’ve accumulated sufficient home equity.
2) Your property value rises because you’ve improved it
As a homeowner, you’re able to increase your home’s equity percentage with a well-timed, purposeful renovation. However, not all renovations boost equity. It’s important to manage the cost of the remodel versus its utility to your household versus its expected return-on-investment. You may not want to spend huge amount of money on new storm windows or a backyard pool if the upgrades won’t improve either your life or your home’s value. This is especially true if you’re planning to move within the next few years. Remodeling a bedroom may have less impact on your home’s resale value than you expect. That said, homeowners frequently build home equity via renovation and remodeling. It’s common for everyday homeowners, and, crucial for real estate investors, whose livelihood is linked to building home equity in a property quickly. If you are interested in evaluating what improvements can be made to your home to enhance its overall value and appeal, we have a great team of Realtors, architects, and contractors who can be extremely useful to you.
3) Your mortgage balance decreases because you’re paying it down
As a homeowner with a mortgage, it’s your right to choose how fast your loan gets repaid. With each payment you make, you pay down loan principal, which increases your home equity (all things equal). You’re allowed to make additional mortgage payments beyond your monthly statement, too. A few well-known principal reduction strategies for homeowners include:
- – Sending extra principal payments with your regular mortgage payment each month, which reduces your total amount borrowed
- – Refinancing into a 15-year mortgage, which is far heavier on principal payments each month as compared to a 30-year loan.
- – Making bi-weekly mortgage payments to your bank
Another option, with mortgage rates low, is to refinance into a lower-rate mortgage loan. Then, at the new, lower rate, continue to make your same mortgage payment as before. In this way, you will pay the same amount monthly, but your payment will be loaded with additional principal, which helps to build your home equity more quickly.
To learn more about these strategies or get pre-approved to own your own home and start building your OWN equity, email me.