Don Anthony Realty

For many people, their home is their largest asset and their best performing investment. The equity in a home is the difference in what it is worth and what is owed. Two dynamics, appreciation and unpaid balance, work in concert to make homeowner’s equity grow.

It can be said that you appreciate the fact that your home is your best financial investment. It is also ironic that the appreciation, the increase in value, is what causes it to be your best financial investment.

In a one-year period, the increase in value divided by the beginning value will determine the rate of appreciation for the year. News stories and articles, frequently, report statistics on appreciation for the month, the year or longer. In many cases, a national appreciation is mentioned but the local appreciation is more reflective of an individual property.

The National Association of REALTORS® reports “The median existing-home price2 for all housing types in June was $363,300, up 23.4% from June 2020 ($294,400), as every region recorded price jumps. This marks 112 straight months of year-over-year gains.”

The low inventory being experienced nationwide has caused some significant appreciation that has increased homeowners’ equity. According to Black Knight, a mortgage technology and research firm, at the end of 2020, roughly 46 million homeowners held a total of $7.3 trillion in equity.

If a homeowner has a mortgage on their home, while the home is appreciating, the unpaid balance is declining. An increasing portion of each payment is applied, when the payment is made, to the principal balance to retire the debt based on the term of the loan.

Each month the equity in the home becomes larger because the home is worth more due to appreciation and the unpaid balance is less due to amortization.

Once a homeowner has sufficient equity in their home, they can borrow against it and take cash out of their home. Most lenders require that the homeowner maintain at least 20% equity position. This means that owners can borrow up to 80% of the appraised value less the amount that is currently owed on the property.

The options include a cash-out refinance mortgage or a home equity line of credit, HELOC. While some institutions have stopped offering HELOCs, they are still available.

The HELOC is a line of credit that is established for usually ten years. The owner is approved, and the money is available to draw out as needed. The interest is calculated daily. Like a credit card, when the balance is paid down, the unused portion of the available credit is available again.

Your real estate agent may be able to offer some lender suggestions.

It has been said that more money has been lost due to indecisions than ever was due to making the wrong decisions. Many times, the larger the decision, the more likely procrastination comes into play and doing nothing will cost something.

Buying a home is certainly one of the biggest decisions people make. Careful consideration and planning are necessary steps leading to a prudent decision. Considering today’s market that includes a global pandemic, financial volatility, and rapidly rising home prices, it is understandable that many people thinking about a home purchase are in a wait and see posture.

However, there is a cost connected to waiting and it may be a lot more than you think. The recent Home Price Expectation Survey 2021 Quarter two estimated appreciation rates will average just under 5% annual for the next five years. It expects prices to increase by 8% in the next one year.

Being a renter or even putting off moving to a larger home, could keep you from enjoying the benefit of that appreciation. If your down payment is in the bank, your expected earning will be less than 2%. In a home, the owner has the benefit of leverage when a mortgage is used to finance the home.

Buyers are borrowing a large portion of the purchase price at around 3% interest but the entire value of the home is appreciating at a higher rate and the profit builds equity for the homeowner.

Another major component for the owner is that the amortizing mortgage is being reduced with each payment that is made. As the home goes up in value due to appreciation, the unpaid balance goes down with principal reduction creating equity from two directions.

If you waited one year to buy a $350,000 home today, the price could easily be $378,000. A 5% down payment on this home at today’s price is $17,500. If you could earn 2% on a certificate of deposit, it would be worth $17,850 in one year. If it used as a down payment on a $350,000 home that appreciates at 8%, the equity in one year would be $52,442. Use the Your Best Investment calculator to make your own projection.

Mortgage experts anticipate rates to rise by 0.75% in the next year which means that you’ll pay more interest on a larger mortgage by waiting. The monthly payment could easily be $200 more by waiting a year. Based on how long you intend to be in the home, it could make the overall housing cost much more.

To run some examples of projections based on your own expectations and at the price you are considering, go to Cost of Waiting to Buy and Rent vs. Own.

If you have some specific concerns that is keeping you from deciding today, let’s get together on the phone, an online meeting or somewhere face-to-face so that you can get the facts about what it takes to buy a home now.