The quieter benefits of your home rising in value
Q: Home prices have been soaring, but what’s the value of higher prices for those who do not wish to sell or refinance? Are higher real estate values anything more than a happy number?
A: Higher home prices have real meaning, even for those who do not wish to sell or refinance.
In November 2015 the typical existing home sold for $220,000 according to the National Association of Realtors (NAR). That same month, borrowers likely paid 3.94% for new financing, according to Freddie Mac.
If that $220,000 home was financed with 5% down, then the original mortgage amount was $209,000. At 3.94% over 30 years, the monthly payment for principal and interest is $990.58. After six years, the loan balance has been reduced to $184,324.
Today, however, the same home was likely worth $356,700 in August, according to NAR.
How much equity does the owner have? We might subtract $184,324 from $356,700 to get $172,376. So — even if not selling or refinancing — our owner should be happy.
More realistically, we can define equity as the property’s market value less any mortgage balance and less 20% of the property’s value. Now we have a $356,700 market value minus 20% or $71,340. That leaves $285,360 in property value less the $184,324 mortgage balance, or “tappable” equity worth $101,036.
Why subtract 20%? Because when lenders consider a refinance many like to see 20% equity free and clear, in case the home must be quickly sold.
According to Black Knight, U.S. homeowners had tappable equity worth $9.1 trillion in the second quarter, an increase of $1.8 trillion during the first half of the year.
The question, though, is not how much equity, it’s what is the value of equity if an owner does not wish to sell or refinance?
Everyone will have different answers, but I suspect the major points will look like this.
First, rising prices are better for owners than falling prices.
Second, if an owner runs into serious financial problems, with lots of equity a foreclosure can likely be avoided by simply selling the property and paying off the mortgage. In markets with soaring home values, it may well be possible to quickly sell the property at full market value. And, in some cases, with bidding wars, maybe for more than the list price.
Third, local governments love rising home prices. As property values go up, that can also be the case with property values. However, in many cases, property tax increases are capped and there are often various exemptions and exclusions that hold down bills.
Fourth, higher real estate values increase net worth, a key measure of wealth.
Lastly, there is also the psychological value of finding marketplace success. There aren’t too many owners who feel badly when home values go up. Simply put, higher prices are good for ego, status and balance sheets.