Losing home equity can and probably will result in a series of serious problems for home owners. The equity in your home represents the part of your home that you actually own. If you lose equity in your home, you can recover it, but it will be more difficult than it was to build it in the first place.
When making monthly mortgage payments, a part of that payment goes towards the loan balance, increasing the equity in your home. At first, a large part of your payment will go towards the interest, but, as time passes, the portion of the payment that goes towards the principal increases, making your equity increase much faster. Home equity is considered an asset, it’s a part of your net worth, and you can use it if you need. Home equity can be used to pay for a second home, medical bills, education, or even retirement.
How Are You Losing Home Equity? What Can You Do About It?
Losing equity can be the result of a bad decision or the result of something that you can’t control. Either way, losing the equity in your home can even result in having to sell your home. Home equity is a powerful financial resource as long as it is used properly. Here’s how you risk equity in your home and a few ways of dealing with these issues:
- Making major changes to the structure of your home. Transforming a basement into one or two rooms, two bedrooms into one bedroom, the garage into a room, or other major changes might seem like good ideas at the time, and you probably have a good reason for making these changes. Unfortunately, major modifications to a home’s structure or layout can possibly lead to a decrease in your home equity. Home improvement projects must be chosen very carefully if you wish to avoid a sudden decrease in the equity in your home.
- Doing a cash-out refinance. This type of refinancing will increase the amount that you owe, and you risk ending up owing more than your home is worth. This means that the equity in your home will be reduced drastically, plus you will be paying interest for the cash that you took out.
- Taking out a home equity loan. Home equity loans use the equity in your home as collateral. The upside is that, if you take out a home equity loan to remodel a kitchen or the bathrooms, the equity in your home may be replaced. Otherwise, your equity will decrease, while the amount that you need to pay back with interest will increase.
- Not taking care of your home. Parts of your home like the roof and even appliances such as your air conditioner and heater don’t last forever. Not repairing them or replacing them, if needed, will result in a home equity decrease. Part of being a home owner means that you have to maintain your home and make necessary repairs, not only to live comfortably, but to also avoid damaging the equity in your home.
- Economic crisis. This reason for losing equity is out of your hands and hard to predict, but, even if you are not affected by an economic crisis, the equity in your home will be. The recent housing market crash has resulted in millions of foreclosures, so if you live in a neighborhood where a lot of homes go into foreclosure, the value of your home will have to suffer.
- Your neighborhood changes. Neighborhoods change all the time, especially after a recession. Your neighborhood might become more accessible to criminals, which will determine many people to move to different areas, and home prices to drop. Unfortunately, there is little you can do in this situation, and the equity in your home will most likely drop, as a result.
Losing home equity can be avoided by not making bad decisions and by resolving the issues that you have power over. In certain situations, there is little that you can do to avoid a drop in your home equity, but even these situations are somewhat preventable. You can recover from a loss in home equity, but it’s always better to prevent a loss than having to build equity again.