Why You Should Care More About Your Property Value Even If You Aren’t Selling
Finding your forever home is a blessing, and you might stop worrying about the real estate market if you intend to stay put. Property value is most relevant for people who plan to buy or sell, but it can have significance to permanent homeowners, too. As one of the biggest factors that influences your equity, property value is still something worth paying attention to no matter how long you plan to live in your home.
What is Home Equity?
Equity is the amount of your house that you actually own. This confuses some people as they believe they already own their entire house when they get approved for a mortgage. Unfortunately, your property isn’t technically yours until you repay your principal loan and interest to your mortgage lender. But your house isn’t up for grabs during that time either as long as you are current on your monthly payments. Instead, you acquire a percentage of your home the more you pay off.
So, let’s say you purchased a house for $400,000. Your original down payment was $50,000. You’ve paid off $100,000 of a $350,000 loan. If the current market value of your home is $450,000, you subtract the amount you still owe to determine the equity. You would then be left with $200,000. What happens next? You have two options. If approved, you can either apply for a home equity loan or a line of credit.
What Is a Home Equity Loan?
Home equity loans allow you to put up the portion of your owned property as collateral in exchange for a cash payment. So, if someone has $80,000 in equity and applies for a loan, they can get a full payment in that amount. You are allowed to spend the money however you want, including home improvements and paying off large sums of debt. This can be a helpful strategy when you are living on a budget and need to decrease debts to increase savings. If you find that you don’t want to pay this amount back, you can instead opt for a line of credit.
If you are putting a portion of your house up as collateral, you might wonder why anyone wants to do this. The primary reason these types of loans are so enticing is that they’re easier to acquire. Credit score does not matter as much because you are presenting the lender with upfront collateral. You also tend to get a much better interest rate than you would with a bank-issued or private personal loan.
What Is a HELOC?
Home equity lines of credit allow you to tap into your equity and withdraw funds whenever you see fit. Similar to a debit card, you only borrow what you want to utilize rather than having the entire lump sum paid out to you at once. HELOCs are ideal for someone who wants to increase their income but does not want to take on significant debt in the process. Rather than taking on two separate payments each month, you can instead pay whatever you spend plus interest. If you’re interested in borrowing an HELOC, you can learn all about how to apply and what the benefits by reading this guide.
Why Property Value Matters
If your house’s value drops before you repay what you borrowed, you could wind up owing more than your house is worth. This forces you into negative equity. In this case, you have several options. You can simply keep paying and wait until the market value rises again, or you can make additional payments to lower the principal balance and avoid more interest. Because this can seriously impact your finances for years to come, knowing about property value and its projected changes before applying is vital.