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Home Equity And Falling Home
Prices: A Dangerous Mix
The latest mortgage predictions are in and,
unfortunately, the news isn’t good for many homeowners:
• Rates on 2 million mortgages will reset
higher by the end of 2008.
• More than 1 trillion dollars worth of
adjustable rate mortgages reset higher in 2007.
• 1 out of every 4 loans that will reset in
2008 may result in foreclosure.
• 4 out of every 100 homeowners may lose
their house to foreclosure before 2008 is over.
You may think that the mortgage crisis won’t
affect you. You may think that you can refinance later because you have
plenty of equity built up in your home. Or you may think that interest
rates will drop in the near future.
However, you might want to think again.
Specifically, you need to think carefully about your home’s equity as it
relates to the trend in home prices.
Even if you have good credit, your ability
to refinance—and the rate and type of loan you can get—is determined by
how much home equity you’ve built up. As a general rule, if your
mortgage equals 80 percent or less of your home’s worth (your
loan-to-value), you’ll have the most options in terms of rates and loan
products. As that percentage increases, your rate will be higher and
your options will be more limited.
Now let’s throw the current trend in home
prices into the mix. In the past, home values—and therefore home
equity—always rose over time, whether it was in the short term or long
term. However, almost every expert is predicting that home prices will
continue to drop over the next year and thus home equity will drop as
well.
See where this is going? The equity you have
now might not be there later. For example, if you have $300,000 left on
your mortgage and your home is worth $375,000, your loan-to-value stands
at 75 percent which will give you good options in terms of refinancing.
But what happens if your home decreases in value by 5 percent to
$356,250 over the next year? You’ll be looking at a loan-to-value of
84.2 percent. With that kind of loan-to-value your refinancing options
may be limited and you might not be able to get the best interest rate
either.
In the end, it’s not about whether or not
interest rates will drop (which, for the most part, they probably
won’t—or at least not enough to make a big impact), but instead it’s
about whether or not home values will drop (which they almost certainly
will, at least in the short term). If you’re concerned about how much
home equity you have and your loan-to-value ratio, consult with your
mortgage professional to see what options you have. ∆ |
