How to protect and grow your home equity
If you're like most homeowners, you're always looking to increase your home equity. But, during periods of economic instability, increasing home equity may be impossible and your attention may turn to simply maintaining the equity you've gained.
Equity “leakage" or reduction can intensify in a softening economy when unemployment rises and consumer confidence declines, but anything that causes home prices in your area to drop will reduce your equity. Of course you won't know exactly how much unless you sell.
Instead of being surprised by falling home equity, manage yours properly so you can maintain or even increase your home's value.
The following tips will help you do that, and will also help avoiding the pitfalls more likely to occur during economic and real estate market fluctuations.
Maintain your home well
There are many ways to reduce spending during economic uncertainty, but one shouldn't be in home upkeep or improvement.
“One of the first areas people cut to save money is home maintenance," says broker John Damiano of The Providence Group of Keller Williams. “But that's the last place you should stop spending," the Atlanta real estate broker continues.
Realtor and attorney, Bruce Ailion, president of RE/MAX Town and Country in Marietta, GA agrees. “Maintaining your home causes your neighbors to be more likely to maintain theirs, protecting all home values in the community."
Make repairs and keep your home attractive and ready for sale or refinancing regardless of what's happening in the economic environment.
Improve — but don't over-improve — your home
Real estate ownership is a long-term investment. Damiano says it's essential you improve your home to keep pace with the neighborhood's trends without over-improving. “Your focus should be on staying in your home, which includes updating it when necessary," he explains.
Not only should you pursue upkeep that maintains your home's value, it's worth committing to improvements to raise its worth. But don't add features to your property that are inconsistent with similar home types in the local market.
Focus on improvements that increase home equity when done correctly, but don't spend too much for your area. “For example, update kitchens and baths and get rid of wallpaper and carpet," says Damiano.
Speed up your payment schedule
Another way to boost your home equity is to increase your monthly mortgage payment or make additional ones to reduce the principal you owe on your loan. Mark Prendergast, CPA, CFP®, CDFA™ and Director of Tax Strategies at Inspired Financial in Huntington, CA, believes this is the best strategy for increasing equity, as you're putting in cash.
“Incremental steps can have a snowball effect, so make principal payments, even small ones," says Prendergast. He suggests that homeowners, “round up to the next $100 or $500 and make that higher payment part of the budget from the get-go."
Consider what you can afford on one income
Damiano has seen buyers get qualified on mortgages based on dual incomes only for one paycheck to vanish during financial downturns. This situation makes can make taking a home equity line of credit to replace income and pay expenses appealing.
Rather than getting into this situation, Damiano suggests getting financing based on a single income and buy less house. “Homeowners should know whether they can afford their mortgage on a single income and change their spending or lifestyle to do that," Damiano says.
If you have two incomes, use one for additional house payments, house maintenance and updates to increase equity. “Paying off the mortgage faster could make it possible to upgrade to a larger home without increasing your financial outlay," adds Damiano.
Maintain this “one income mortgage" mindset with the next home, too he suggests.
Use home equity financing wisely or not at all
There are tempting reasons to get a home equity loan or line of credit. But Prendergast reminds homeowners, when you do “you decrease your net worth" because your largest asset now has a lower value.
“Home equity loans also put a stress on family finances and higher monthly mortgage payments cause anxiety," he adds.
All three experts agree that homeowners should only get equity loans to fund things that increase their income in the long run. “That includes starting a business or investing in equipment for a business you already own," says Prendergast.
Ailion adds, “Getting an equity loan to preserve or enhance home value or invest in education that increases your salary also may make sense." But Prendergast says your increased business or post-education income should be above the monthly equity loan payments.
“It's best to save for expenditures and not use home equity to fund a new car or anything that depreciates," asserts Damiano.
Remain levelheaded during economic instability
These professionals also agree that homeowners should avoid emotional responses to marketplace fluctuations. Damiano, a former retail manager says, “I've seen consumer reaction to financial news worsen overall economic uncertainty repeatedly."
Instead of getting overly concerned, plan to stay in your home for ten years or longer, then use these tips to carefully plan for market instability, and maintain or increase your home's equity. “The key is not to get shaken by short-term swings in prices," Ailion states.