How could it change the equity in your home?
As anyone who ever wanted to buy or sell a home knows, housing prices change regularly. This creates obvious effects for those transitioning. Lower housing prices are great when you want to buy, while higher prices help when you want to sell. But what if you are in your home? The impact of changes to the housing market may not hit with the same force as when you are getting ready to move, but they can still change your financial footing. In particular, the rise and fall of housing prices alters the equity you have in your home. Understanding how this works can help guide your decisions while you still hold a mortgage.
How Equity Works for You
Your equity in a home represents the difference between what you owe on it and the value of your home. It can be positive or negative, and usually, it increases as you pay off your mortgage. It typically moves into positive territory within five to seven years of regular, on-time mortgage payments. As you gain equity, you increase your net worth by owning more of an interest in your property than you owe to the holder of your mortgage note. Many mortgage holders even allow you a line of credit based on your equity in the home. It may work as a one-time loan or as a revolving, secured credit line. It essentially allows you to access your increased wealth as it builds.
On the other hand, every time you tap into this credit source, you both reduce your net worth and increase the amount you have to pay back. Used carefully, it becomes an effective safety net for potentially large expenses you incur as a homeowner. If you use it irresponsibly, you prevent yourself from paying your home off in a timely manner.
How Housing Prices Affect You
A wrench in the works, though, is that home value is never a fixed mark. If housing prices go down, the equity in your home goes down too. You might go from positive to negative based not on the payments or your use of credit, but simply on a drop in home value. And depending on the terms of your loan or credit line, it may cost you significantly.
On the other hand, you can also take advantage of fluctuations in the housing market. If you look to refinance, an increase that bolsters your financial position in the home can lead to more favorable terms. Higher home values, besides bolstering your equity, can lead to lower mortgage rates. If you take advantage, you may find yourself paying less in interest over time, or getting the opportunity to sell early for a relative windfall.
If you own a home and make mortgage payments, you should not ignore the housing market, even if you have no interest in moving. Part of careful financial management is looking for ways to seize advantages. Your house is usually your most valuable asset. Manage it accordingly to strengthen your financial outlook.
Equal Housing Lender