If you live in a fast growing area, chances are the home equity that you have is growing quickly.
Home equity is the market value of a homeowner’s unencumbered interest in their real property—that is, the difference of the home’s fair market value and the outstanding balance of all liens on the property. So if your home is worth $300,000 and you have an outstanding balance on your mortgage of $200,000, you have $100,000 of equity in your home.
Home equity gains were strongest in faster-appreciating, higher-priced markets
You can think of it as the rich getting richer. If you live in an area where real estate values are increasing the most, it’s probably not surprising that homes in your area have seen a greater rise in homeowners equity than in other areas.
Washington and Oregon lead the way
For several years, the Pacific northwestern part of the country has seen a large increase in population; until recently when South Dakota took the top spot, Oregon had been the fastest growing state in the nation as measured by influxes and outflows from other states.
Regardless of a slight slowdown, with a 10.2 percent and 10.3 percent increase, Washington and Oregon, respectively, had the largest home appreciation percentages of any state in the U.S. during 2016.
It wasn’t just a percent increase either, the actual dollar gains in homeowners equity during 2016, $31K and $26K, in Washington and Oregon, respectively, were higher than another other state.
Not to ever be ignored when it comes to real estate, California, while only showing a 5.8 percent gain year-over-year, did have the third-highest actual dollar gain, $26K, of any state. The nearly 6 percent gain, while modest compared to its two west coast neighbors, is still considerable compared with other states in the nation.
Average home equity rose by $13,700 in the U.S. last year
Led by those three western states, the average equity that American’s had in their homes increased by $13,700 during 2016. For the year, that’s a 6.3 percent increase. New York, New Jersey, Texas, along with several other southern states showed sizable gains in equity as well.
The gains in the New York and Massachusetts were $23K and $20K, respectively, while Florida has a $17K increase and both home equity in both Texas and Arizona increased by $13K.
Shorter term loans helped
The increase in home values was certainly the primary factor for the increased property valuations, but the length of mortgage also contributed. While the 30-year fixed rate loan remains the most popular option among home buyers, shorter term loans have been gaining in popularity of late.
Lead by the 15-year fixed rate loans, roughly one-in-four home loans today have a term of 20 or fewer years. Shorter term loans result in faster appreciation rates as the mortgages are paid off more quickly.
A 15-year loan can quickly, dramatically increase your equity
As an example, a borrower with a 30-year fixed rate with a 4.5% rate of interest who borrowed $200,000 will have paid off nearly $40,000 in principal on their loan after ten years. While a borrower with a 15-year fixed rate with a 3.85% rate of interest who also borrowed $200,000 will have amassed over $120,000 in equity after ten years.
(These interest rates are purely for illustration purposes, but are estimates based on today’s prevailing rates.)
While the shorter loans help you pay off your mortgage more quickly, the monthly payments are much more expensive. In the above example, the 30-year would cost about $1,013 each month, while the 15-year loan would cost $1,464; over $450 more each month than the longer termed loan. This added expense — in this example, roughly $5,400 each year — certainly limits the number of people who are willing and able to take on the shorter-term loans.
Even many who could afford to make the higher monthly payments choose the longer termed loans. Many people are simply much more comfortable with lower monthly payments even when they understand that over the life of the loan they will be paying more money. Again, using the above example, the borrower with the 30-year mortgage would spend $164,000 in interest on their $200,000 loan. The borrower who opted for the 15-year loan would spend roughly $64,000 in interest for the life of the loan; $100,000 less than the borrower who opted for the longer, 30-year loan.
7.7 million have less than 20 percent equity
While the financial and real estate crises from 2008/09 may be a distant memory for most people, there are still many people whose mortgages are under-equity. That is, they have below 20 percent in equity in their homes.
Borrowers with less than 20 percent equity are considered to be under-equity. Today, roughly 7.7 million, or 15 percent, of mortgaged-residential properties have less then 20 percent equity and are under-equitied.
800,000 are near negative equity
Roughly 1.6 percent, 800,000 homeowners, have less than 5 percent equity in their homes. Needless to say, these near-negative equity properties are at risk should the value of their homes decline.
An additional 600,000 properties would regain equity if home prices rose by another 5 percent.
Homes will be getting more expensive
The value of homes may be rising, but higher interest rates might put a damper on the party. Even though the Federal Reserve increased interest rates, that doesn’t automatically mean that interest rates on home mortgage will automatically increase as well; those rates do not move automatically based on what the Federal Reserve does. However, when the Fed is sounding optimistic about the economy, as it is today, mortgage rates do tend to move up, which have been doing of late. In expectation of a Fed increase and expectations of a strengthening economy, mortgage rates have climbed substantially.
Last week the average 30-year fixed rate mortgage was at 4.21 percent. It had been 4.10 percent the week before, and 3.68 percent a year ago, according to Freddie Mac. But the big move up in mortgage rates came right after the November presidential election, when a popular notion among investors was that President Trump and a Republican Congress would spur the economy with tax cuts, reductions in regulation and infrastructure spending. Just before the election the average 30-year mortgage was roughly 3.54 percent. The almost 19 percent move to the current 4.21 percent is a large increase in such a short period. With higher interest rates on mortgages, fewer people will be able to afford to buy a home.
Image credit: Curbed