Why Your Home's Value Is Important
Why Your Home’s Value Is Important
The importance of knowing the value of your home
Knowing what your home is worth can be very important. Renovations, refinancing, insurance premiums, your annual tax bill, and avoiding or removing private mortgage insurance (PMI), are all affected by your home’s value. The more your home appreciates, the more equity you will have.
What is equity in a home?
The value of your home is directly related to your equity. Equity is calculated by subtracting the mortgage balance (or debt secured against your home) to the home’s current value. Equity is gained as you pay toward the principal of the mortgage loan or as the home’s value increases. You can also create equity in your home by doing renovations that can improve the marketability of your home.
5 things that are affected by the value of your home:
1. When you are looking into selling your home
When you want to sell your house, you want to get as much money back from the sale of the home as possible. The equity is the money you get to keep after costs and any applicable taxes are taken into account. When you sell, the equity can be used for the down payment of another home. Lenders will have different loan products that can help access the equity if you are still waiting for it to sell (like a bridge loan).
2. Looking to do renovations to your home
It is important to know the value of your home before you do renovations. This is important If you intend to sell it for what you paid for, plus any money you spent on renovations. There are also lenders that specialize in financing renovation loans. They use products like the FHA 203k loan, Fannie Mae homestyle renovation, home equity loans and much more. The more equity you have in your home the more money they will allow you to use for the renovation project. You can find a lender that does these types of loans by going to chopdog.com.
3. When you want to refinance
If you want to get the best rate possible when refinancing, having more equity in your home is among the best ways to get a better rate. If you work with a lender, often times they will take the extra time to make sure you have a good understanding of what your home is worth and what value to expect before you get an appraisal.
4. Lowering your tax bill
On rare occasions if you get an appraisal done on your home and the value comes in lower than what the county assessed it for, you can submit your appraisal to the county and make your case why they have over-valued your home for real estate tax purposes.
5. When you want to consolidate debts
It is important to have equity in your home if you want to consolidate some debts, like high interest rate credit cards. Depending on the type of loan and the lender, you might not be able to take a loan out for 100 percent of the value of your home. Having more equity will allow you take more cash out to consolidate debts.
What's the difference between market value and the appraised value of your home?
The appraised value is the value that has been determined by an appraiser, county recorders, or bank. The appraiser comes to the value by looking at homes that have sold in your area that are comparable to your home. Then the appraiser comes up with an objective and logical value for what your home is worth. On the appraisal report you might see some adjustments based on the differences between your house and the comparable homes. Those adjustments can add or subtract from the appraised value.
The market value is the price the consumer is willing to pay. Normally this will hover very closely to the appraised value. For example if you finished a kitchen remodel, a buyer might desire your house more than a comparable house because it fits their needs better. The buyer would be willing to pay above the appraised value to ensure they get the home.
Why does the equity in your home affect PMI?
PMI, also known as private mortgage insurance, is insurance for the lender in case the borrower can’t pay the mortgage and the home goes into foreclosure. When a home buyer purchases a home and puts less than 20% down, a lender will require the buyer/borrower to pay PMI with the monthly payment. If they want to buy a $200,000 house, the buyer now takes $40,000 out of their pocket.
How to figure out what your home is worth?
A good starting point to get an idea of what your home is worth is by using websites like Zillow, Trulia and Redfin. These sites are not always completely accurate with their evaluation systems. According to Zillow, “The nationwide median error rate for the Zestimate for on-market homes is 1.9%, while the Zestimate for off-market homes has a median error rate of 7.5%. This means that the Zestimates for half of all on-market homes are within 2% of the selling price, and half are not. For most major markets, the Zestimate for on-market homes is within 10% of the final sale price more than 95% of the time.”
These sites are best used for single family homes in markets where all the homes are very similar. The accuracy will decrease with the uniqueness of your home. Certain home types have larger variances in the value on those sites like condos, multi-family homes, or co-operatives and townhomes. It's always best to do some preliminary research yourself. You can do this on Zillow by filtering through the sold homes that are the same home type as yours. Find a couple of the same home type with similar features and updates that have sold within the last 6 months. Now, take those comparable homes and first use the ones that are closest to your home, while not crossing into any other subdivision or major freeway or road. This should give you a starting point into what your home would sell for in this market.