Tips & Trends for the Flagstaff Real Estate Market:
Past Articles [May 2004]
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Home Equity! What is it and how you can make it grow
Homeowners are wealthier than renters, by an enormous margin, according to the 2003 State of the Nation's Housing report from Harvard University's Joint Center for Housing Studies. At the end of 2001, the median household net worth of homeowners nationally was $171,800 compared to only $4,810 for renters. Home equity accounted for the huge disparity in household net worth.
Home equity is the difference between the value of a home and the liens secured against it. If you buy a $200,000 home using a 20 percent down payment you will have a $160,000 mortgage and $40,000 equity in the property.
One of the benefits of buying real estate is that you can buy an expensive asset with a relatively small amount of your own cash. This is called leverage. As your home increases in value over time “called appreciation” you earn appreciation on the entire property, not just on your down payment amount.
For example, if the property above were to increase 7 percent in just one year, the property value would rise to $214,000. However, your equity would increase 35% percent-from $40,000 to $54,000. This is the beauty of leverage and is the reason why you should buy a home if you are able.
However leverage can backfire if property values drop significantly and you have to sell your home. If the value of the home above fell 7 percent, you'd be lucky to break even when you sold.
Fortunately Flagstaff has seen a steady appreciation in home values through the years. There have been periods of deflation and stagnation in our market but they have been generally short lived. Over several years of home ownership, home price appreciation can substantially increase your net worth. Besides appreciation, paying additional principal only payments and adding well thought out home improvements can add equity to your home.
But beware! Accepting those solicitations for home equity loans, or letting your home fall into a state of disrepair is a sure way to reduce or lose the equity in your most prized possession.
You can view the report cited at the beginning of this article at http://www.jchs.harvard.edu/publications/markets/son2003.pdf.
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