Home Equity and Changing Real Estate Markets

By Karen Lawson
LoanPage.com Columnist

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Recent reports of declining home values and rising interest rates highlight the importance of knowing your home's value. If you're considering a home equity loan, it's a good idea to maintain a cushion of home equity to guard against potential declines in property values.

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Real Estate Markets Affect Home Equity

The amount of your home equity is generally defined as the difference between your home's current value and the amount you owe on mortgage. If your home is worth $250,000, and you owe $200,000 on mortgage loans, your approximate equity would be $50,000. Mortgage payoff amounts can change the actual amount of your equity, but local real-estate trends can also impact home equity. As an example, let's say your home is worth $350,000. If its value declines by 2 percent over the next year, this would represent a decline of $7000. If home prices continue to decline, this trend could cause a large reduction in equity.

Spending Your Home Equity Wisely

Increasing mortgage foreclosures and interest rates are causing home values to decline in many areas. Although a home equity loan can provide cash for a variety of purposes, it's important to carefully consider how market trends in your area may affect your equity. If you borrow too much against your home equity, and property values continue to decline, it's possible to end up in a negative equity position where you owe more on mortgage loans than your home is worth. It might be wise to delay funding your next vacation with a home equity loan. A financial advisor can help you determine the most effective use of home equity financing.

About the Author
Karen Lawson is a freelance writer with extensive experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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