How To Build Equity In Your Home
Seventy percent of the mortgage loans in Nevada have negative equity. The number of underwater homes in Florida and Arizona are also pretty dismal. Underwater homeowners are unable to sell their homes unless they have a huge savings or can qualify for a short sale.
This stat is pretty staggering really. Nevada’s real estate market was out of control and they are now suffering the consequences. With the way things are headed in both the national and local real estate market, it’s possible that Homes in Arlington Texas or Riverton Utah Real Estate values will decrease. It’s also not likely that home values will see any significant appreciation any time in the next five years.
Is there anything that can keep our property values from decreasing? How do we keep from having negative equity in a declinding market?
Well… we can’t really control the external factors associated with the real estate market, the federal government has already tried that, but we can control the amount we owe on our mortgages. Only a very small percentage of the mortgage payment actually goes towards principle during the first few years of thirty year mortgages.
One of the ways that you can easily reduce principle is with a 15 year fixed mortgage. Right now, the average interest rate for 15 year mortgage loans are the lowest they have ever been. By refinancing to a 15 year fixed mortgage, your payment will be a little bit higher, but the amount of principle paid off will be exponentially more.
In just the first year of a 15 year fixed mortgage loan, principle is reduced by nearly 5%. If market values dropped by five percent, then you would have kept pace with the real estate market.
But, this was JUST the reduction for the first year of the loan. The neat thing with amortization schedules is that each year more principle is payed off.During the fifth year of the loan, the mortgage amount will decline 7.5%, during the tenth year equity is reduced 15%, and during year 14 it is reduced 50.6% and year 15, it will be reduced 100%. At this point, you will actually OWN the property. With a 30 year fixed mortgage, at the 15 year mark the loan is only 30% paid off. It takes homeowners with 30 year mortgages twenty years just to get 50% equity.
The attitude towards real estate investments has definitely changed in the last decade. Mortgage lenders used to recommend “no money down loans,” “option ARMS” and “interest only loans because real estate was an automatic investment. Now, the smart thing to do is to pay off the mortgage and eliminate the house payment altogether. By having more equity than market value, sellers aren’t chained to their current house and are free to move at any time.
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