Valuing Your Home: Lost Home Equity Can Bite You
It’s hard to go a single day without hearing or seeing a headline shouting about the mortgage crisis. High foreclosure rates and tighter lending practices are causing the inventory of houses for sale to increase and the number of sold houses to decrease. This has created a drop in average housing prices as the supply outstrips the demand.
What does that mean to you though if you have no intention of selling your house tomorrow? It can mean plenty and can even land you into financial hot water. When the average sales price declines in a neighborhood, the decreased value is also attributed to the occupied houses in the area. If, for example, housing prices come down 20% this year in your community, it means that your house is worth 20% less.
The main party that will care about that is your mortgage company. They have loaned you the money to purchase the house of the basis of its value at the time of the loan. Now that the value has decreased, the loan-to-value ratio has gone up which means the mortgage company is taking on more risk than they had initially intended. The value of your home may now be even less than the balance of your mortgage. This is called “being upside down” on your mortgage. If the mortgage company had to take your house back and sell it, they would be out of pocket for the shortfall.
Many mortgages have provisions for calling the mortgage in an upside down position or forcing the borrower to pay the difference immediately. This can leave you scrambling to make alternative borrowing arrangements.
Understanding your particular situation is the first step towards protecting yourself from the equity erosion in your house. Pull out your mortgage documents and read them. Look for any provisions relating to changing values on your house. Then compare the current value of your home to your mortgage balance. A valuation can be the informal opinion of a real estate agent or a more formal assessment by a property appraiser. If you are at risk of going upside down on your mortgage, look for ways to pay down the balance. Keeping the lines of communication open between you and your banker will also help.
Losing equity in your home can be disheartening but keep in mind that, in all likelihood, the real estate market will eventually rebound and will reinstate that equity. Common sense and an understanding of your borrowing situation will help get you through the current rough patch.
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Tags: heloc, home equity, home values, line of credit, real estate investing, refi your hoe, refinancing
This entry was posted on Wednesday, March 11, 2009 at 6:31 am and is filed under 401k, Financial Education, Investing in Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
One Response to “Valuing Your Home: Lost Home Equity Can Bite You”
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Ned Carey Says:
Wow, I never heard of such a thing. I’ll have to check my loan docs.
I think the risk is low that a lender would do that today. Why would they take a performing loan and turn it into a loss?
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