Real Estate Markets Can Impact Your Home Equity

By Karen Lawson
LoanPage.com Columnist

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You've heard the news. Property values are decreasing in many areas. So what? You're not planning to sell your home any time soon, but your home equity may be affected. What is home equity, and how can the real estate market affect your household budget and financial planning? The answer involves the amount of your home equity. Mortgage companies and other lenders have made it easy to borrow against your home equity for anything from boats and high fashion to college educations. As real estate markets slump, your home may diminish, and you'll have less borrowing power.

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Home Equity 101

Home equity is the difference between the amount you owe on your mortgage and other home loans, such as equity lines of credit. Let's say your mortgage balance is $280,000, and you also have an equity credit line balance of $5,000, for a total of $285,000. Your home is worth $400,000. Your home equity in this scenario would be 115,000. If the value of your home decreases to $350,000, your home equity is now $65,000. If you are planning to tap your home equity to meet short or long term financial goals, fluctuations in real estate markets can impact your plans and your mortgage lender's ability to extend credit based on your home equity.

Home Equity Loans Provide Options

During the recent real estate booms, you may have used some of your home equity to remodel your kitchen, pay off high interest credit cards, or pay for college. Financial experts encourage homeowners to use home equity loans for home improvement, and reducing high interest consumer debt. If real estate markets are cooling off in your area, you may want to think twice about first class tickets to Paris, and you may also want to consider low cost federal student loan programs to fund your kids' education. Consulting a financial advisor can help you learn how to use home equity to achieve your financial and life goals.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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