The Home Equity Playbook - Play to Win!
Brought to you by Mike Ramsey, your Prosper Realtor who specializes in DFW / Dallas area homes for sale.
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 $325,000
Existing Mortgage $225,000
Homeowner Equity $100,000
One side of the equation is well defined, and it is found on the monthly mortgage statement, the loan balance. The other side is less obvious — the current market value of the property.
As a homeowner, your down payment purchases your initial equity, and your monthly (or additional) principal payments increase your equity. In the DFW area, we have experienced a strong real estate market for several years because we have been living in an in-demand location. The equity in our homes has increased quite rapidly as the property values in our area have increased. The inverse can also happen — too much available inventory and market down-cycles can lead to falling home values and a reduction in homeowner equity. That certainly happened across the nation during the "Great Recession" between the late 2000's and early 2010's.
It can be difficult to put an accurate value on something that you have emotional and monetary vesting in. It is safe to say that most people think their home is worth more than then it is.
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in the neighborhood but should stay away from websites such as Zillow and Trulia, which provide inaccurate and outdated estimates. The most accurate measurement requires a comparative market analysis from a real estate professional or having the home professionally appraised. But, the bottom line — your home is worth as much as someone is willing to pay for it.
How Do We Play To Win With Home Equity?
The key to winning at anything is to have the right mindset. Think of home equity in terms of investment and increasing value. Have a mindset of protecting your investment and increasing the value of your home. You do that by building the equity in your home. In other words, you increase the value of your home. Why is this so important when it comes to selling your home someday? Simple. Investing in your home's equity likely means that it will be more attractive to future home buyers because you took care of it so well. The winning strategy is to make your home stand out in a sea of other homes that are on the market. The sheer amount of competition that you will face can be intimidating. To prove my point, try googling the phrases, DFW / Dallas area homes for sale, or Frisco homes for sale, or McKinney homes for sale, or Prosper homes for sale. The list goes on! It doesn't take long to see that you are competing with hundreds of homes all competing for the exact same buyer!
Keep reading to see how to gain a clear advantage over other homes on the market!
Creating Value is in Your Hands
I love working in real estate because it allows me to help people find their own personal space where they can find safety, raise their children and build their memories. When working with buyers to help them find their "dream home", I advise them to invest in a home that will be more likely to increase in value than similar properties in the area. On the other hand, when working with clients who are selling their home, I make suggestions that will help them sell their home faster and for the best price. Whether I am working with buyers or sellers, I always remind them that the final decisions are ultimately up to them.
The decision to increase and maintain value in your home is always in your hands as the homeowner.
Ways To Create Value In Your Home and Increase Your Home's Equity
1) Buy a Winner. The best time to start thinking about your home's equity is when you are choosing your home! Have your real estate professional run an analysis of the current market value of the home you are thinking about buying. Have them give you reports on how quickly homes in the area have increased in value. It is also important to have your agent advise you about what factors in the home will help increase or decrease the value of your home and its future marketability. For example, will the home need expensive repairs in the near future, or does it back up to a busy street? These examples are part of a long list of factors that will affect the current value and future value of your home.
Remember, not all homes with needed repairs, or undesirable features are bad purchases. In many cases, homes are able to be purchased for a lower price because they have issues and a few fixes can increase the market value of the home for more than the cost of repairs. On the other hand, some homes have so many issues that are either too expensive, or unresolvable, they are best to be avoided. Your real estate agent can help you make a wise decision before you purchase by recommending inspectors and service providers who can give you estimates for repairs.
2) Do the work. Maintaining the condition of a home is vitally important to retaining and increasing value. Homes are judged against their peers: how they compare to similar homes in the neighborhood. Another way to retain value is to not over upgrade since it is rare to ever recoup the money spent if you exceed neighborhood value. Keep up the landscaping and do the little things to add curb appeal. Having your HVAC and other home systems regularly serviced, painting and sealing exterior areas regularly and taking good care of floors and appliances are all necessary for retaining your home's value and building equity.
3) Invest in Your Investment. One of the best ways to increase the value of your home is making wise decisions in upgrading both practical and aesthetic features in your home. Always take the return of investment (ROI) into consideration. 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.
4) Pay it off. Paying a little extra in your mortgage payment each month can be extremely effective in building equity and paying off your home early. It's also wise to create long-term and short-term savings accounts for future repairs and upgrades.
5) Get Ready to Sell. It's true that gorgeous houses sell faster and for more money than ugly, rundown houses. Even if you take good care of your home, some of your personal decorating tastes might not be appealing to the general public. A small investment in fresh paint, new kitchen appliances and hiring a home stager can have a high ROI. Your real estate agent can help you make wise decisions when getting your home to sell. To take it a step further, hire a real estate professional who excels at marketing your home, not by just listing it on the MLS, but by getting the word out there on social media and other forms of advertising.
Putting Home Equity to Work
Home equity represents the largest single asset of millions of people, 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 it is borrowed against.
There are two types of loans that tap into homeowner equity as collateral. However, I am not going to spend much time on these because the purpose of this article is to help you build up your equity, not decrease it.
Home Equity Loans. Many home equity plans set a fixed period during which the person can borrow money, such as 10 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 period has ended. 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 period, 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 and is usually prime plus a set number, but the required payment is usually interest only. Once the loan has been paid down, the payment is reduced, and it can be paid off and initiated as many times as a homeowner requires.
It’s Important to Use Your Home Equity Wisely
Because it is likely the biggest asset most people have, losing your home equity is hard to overcome. In my opinion, using home equity should be avoided whenever possible. If at all, it must be used in prudent ways, and the payments against the loan must be affordable. Using equity money to make the loan payment is only acceptable for a short-term solution.
In my experience, there are a few ways where taking out a home equity loan or line of credit was a good idea for my clients. In one case, my client was selling their house and wanted to make about $6,000 in repairs to make it more marketable. They had just spent most of their savings on an unexpected medical expense and a home equity loan allowed them to make the repairs, sell the home faster and for more money. They paid off the loan at closing and it was a short-term solution with a foreseen resolution. Other clients have used home equity to help supplement their children's education or their retirement when their other forms of savings have suddenly fallen short. In those cases, they were not planning on selling their homes in the near future and consulted their financial planners first.
On the other hand, not-so-wise uses of home equity loans and lines of credit would be for purchasing pools, lavish landscaping, boats or vacations. Home equity is not a wise idea for purchasing anything with little to no ROI, or as a long-term solution. A good financial planner would advise their clients to find other ways to fund such purchases.
Bottom line, 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. And approach your home's equity with the mindset of always building it up. After all, the higher the equity in your home, the less you owe the bank!
Looking to sell your home in the DFW / Dallas area? Let us show you how we can help you sell your home faster and for more money! Here are the links to take a look at our robust home marketing strategy. Contact one of our trusted agents today. Mike Ramsey, your Frisco Realtor who specializes in DFW / Dallas area homes for sale.
Mike Ramsey, your McKinney Realtor who specializes in DFW / Dallas area homes for sale.