To protect your Silicon Valley Home Equity, Let's First Define What Is Home Equity.
Home equity seems to be a very simple calculation — the total amount of mortgages owed subtracted from the current market value of a home. Here is a simple example:
|Current Home Market Value||$825,000|
Finding one's mortgage balance is relatively easy on your monthly mortgage statement, “present loan balance.” The current market value of the property is not as easy to determine over time.
As a homeowner, your down payment represents your initial home equity, and your monthly (or additional) principal payments increase your equity further. In an active real estate market or markets with limited inventory equity can increase quite rapidly as home values increase, but the inverse can also happen — too much available inventory and market down-cycles can lead to lower home values and a reduction in homeowner equity.
When you are emotionally attached, it can be difficult to put an accurate value to any asset. It is also safe to say that most people think their home is worth more than then it is.
Silicon Valley Homeowners can make savvy assessments about their home’s current market value by following the sales of similar properties in the neighborhood but should stay away from websites such as Zillow and Trulia, that often provide inaccurate and outdated estimates. The most accurate measurement requires a comparative market analysis from a real estate professional or a home professionally appraised who knows the local market.
Ways to Creating Value
Maintaining the condition of a home is crucial to retaining and increasing value. Homes are judged against their peers: how they compare to similar households in the neighborhood. Another way to maintain value is not over to upgrade or over customize to personal likes since it is rare ever to recoup the money spent if you exceed neighborhood value.
“Keep up the landscaping and do the little things to add curb appeal.”
Putting Home Equity to Work
Home equity represents the largest single asset of millions of Americans, and because it represents so much of an individual’s net worth, it must be treated with respect. Home equity is not a liquid asset until a property is sold, or the equity is used as collateral for another investment.
Two Types of Loans Tap into Homeowner Equity
Home Equity Loans
Many home equity plans set a fixed period during which the person can borrow money, such as 10 or 15 years. At the end of this “draw period,” the person may be allowed to renew the credit line. If the plan does not allow renewals, the homeowner will not be able to borrow additional money once the draw period ends. Some plans may call for payment in full of any outstanding balance at the end of the period. Others may allow repayment over a fixed term, for example, of 10 years.
A home equity loan, sometimes called a second mortgage, usually has a fixed rate and a set time to pay it back, generally with equal monthly payments.
Home Equity Line of Credit
A home equity line of credit is similar to a credit card. The lender sets a maximum amount you can borrow, and you can draw money as you need it, though many home equity lines of credit require an initial draw. The interest rate varies daily based on a national loan index (e.g., The Prime rate) plus a premium the lender charges, but the required payment is usually interest only. Once the loan has been paid down, the amount reduces, and it can be paid off and initiated as many times as a homeowner requires.
How Much Equity can be Accessed?
Since the financial institution is lending money and using a home as collateral, they will only lend up to 80% of the home’s equity. The bank does not want to take the risk that if the house price drops, they would be carrying a loan for more than its market value.
It’s Important to Use Your Home Equity Wisely
Home equity is likely the biggest asset for most people, so it is important to know how to manage it effectively. There are some good reasons to use money from a home equity loan… and some dangerous ones. First, let’s cover smart uses.
1. Invest in Your Home
The best way to use the money is to create more equity in the home. Among the very best returns on your investment (ROI) include kitchen and bathroom remodels, adding square footage or an extra bath, enhancing curb appeal and repairing/keeping the existing structure sound. Making prudent investments in your home is a wonderful win-win: you enjoy the upgrades, and the repairs can add value to the home.
2. Invest in your Children’s Education
Using your home equity to finance a child’s higher education may be the greatest payoff of all. Not only is the rate much lower than a student loan, and it is also an investment in the child’s future.
3. Supplement Retirement Needs
Older homeowners spent their working lives paying down their mortgage. At retirement, when monthly income is reduced, a home equity loan could pay for a dream vacation or a major unexpected expense.
4. Augment the Impending Sale of a Home
If you’re planning to sell soon, a home equity line of credit may be the best way to finance improvements, and you can pay it off entirely when you sell. Investing wisely in upgrades and repairs may even reap a profit on your investment.
Here are some examples of some not very wise choices.
- Adding luxury amenities like a swimming pool, a hot spa, lavish landscaping, upscale appliances and exotic countertops and flooring rarely pay off.
- Purchasing a car or boat or most any personal luxury items is a poor use of the funds since these items quickly depreciate.
- Also stay away from using the money on risk-heavy investments. Financing stock purchases, start-up businesses and paying routine bills is not financially smart.
You should treat a home equity loan as an investment and not as extra cash when making financial decisions. If your intended use of the money doesn't pay you back in some way, it's not the best use of your valuable equity.
We Are Happy to Assist You
If you would like an assessment of the market value of your home and the current equity you can access, give us a call. We'd be happy provide you with a complimentary Comparative Market Analysis.
Tom Stynes, StynesGroup Real Estate Services, your source for Silicon Valley real estate