Category: Real Estate

6 ways to build home equity and stay withing your budget

Home equity is the percentage of your home’s value that you own, and it’s key to building wealth through homeownership. Let’s take a closer look at how to build home equity without blowing your budget — and how to access it when you need it.

How much equity do you have?

Equity is easy to calculate when you first buy a home because it’s basically your down payment. For example, if you put $11,250 down on a $225,000 home, your down payment is 5 percent and so is your equity.

From 2016 to the first quarter of 2018, most first-time home buyers in the U.S. started with about 7-percent equity, according to Inside Mortgage Finance. This is encouraging because it shows you don’t need to spend years saving for 20 percent down or more before you buy. Repeat home buyers started with more equity, at about 17 percent.

How to build your equity

Here are six ways your home can create wealth for you. Some require time, money — or both. A lender can help you decide what works best for you.

1. Let your home appreciate

Building equity through appreciation can take little time or a lot, depending on the market. With home prices going up like they have in recent years, appreciation has been a boon for many home owners.

Zillow research indicates that the median home value grew from $185,000 in April 2016 to $216,000 in April 2018. If you bought a home for $185,000 in April 2016 with a down payment of $12,950, your beginning 7-percent equity would have grown to 23 percent by April 2018.

We calculate this by subtracting your current loan balance ($165,600) from your home’s current value ($216,000). Then we divide the difference by your home’s current value. One-eighth of this additional 16 percent equity is from paying down your mortgage, and the rest is market appreciation.

If you waited two years and bought the same home in April 2018 with a 20-percent down payment of $43,200, you started off with 20-percent equity. You also used 3.3 times more cash to make the purchase. And here’s the kicker: Your total monthly housing cost would be the same — about $1,050 in both cases.

This example illustrates two things:

First, the power of home appreciation. It’s a lot like buying stock and benefitting as its value goes up. But there’s also a difference: While you’ll pay capital gains on rising stock value, you’re exempt from paying taxes on primary-home capital gains up to $250,000, or $500,000 for married couples.

Second, waiting to “save enough” isn’t the primary factor in determining if you can afford to buy a home. When it comes to qualifying for a loan, lenders do indeed look at your down payment. They’ll also want to know how much you’ll have in cash reserves after closing. But there are lots of options for low down payments that require minimal reserves.

Your monthly budget is the primary factor lenders consider when deciding whether you can afford a home. Lenders will allow you to spend between 43 percent and 49 percent of your income on monthly bills, which is actually on the high side and could strain your budget.

Since 2016, most first-time buyers have spent about 38 percent of their income on housing and other debt, which is a pretty safe cap for budgeting.

2. Make a larger down payment

You can do this but, as we’ve seen, waiting to save extra cash can go against your broader financial interests if you lose the chance to build equity through appreciation. Therefore, you must strike a balance among down payment, monthly budget and savings for other priorities. A good lender can provide rate and market insight to help you do this.

3. Use financial windfalls

Take advantage of work bonuses, family gifts and inheritances to pay down your mortgage. If you do pay down in lump sums, see if your lender will recalculate (or “recast”) your payment based on the new, lower balance.

4. Double up on payments

Make mortgage payments every two weeks instead of once a month. Over the course of a year, this will add up to 13 monthly payments instead of 12. You’ll build equity faster and shave five to six years off a 30-year mortgage. Just make sure your lender isn’t charging extra for processing bimonthly payments.

5. Cut your loan term in half

Take out a 15-year mortgage instead of a 30-year mortgage, and you’ll build equity twice as fast. Two caveats here: You’ll have a significantly higher monthly payment and, because of that, you may have a tougher time qualifying.

6. Make home improvements

New appliances or cosmetic features like paint are unlikely to increase value. Only big improvements like new kitchens, or additional bathrooms or other rooms will add meaningful value. Make sure the cost of such improvements will create the added value you’re looking for.

How to use your equity

You must borrow or sell your home to use your equity. The three most well-known ways to get to your equity through borrowing are a home equity line of credit (HELOC), home equity loan or cash-out refinance. Compare the pros and cons of each.

Report: Co-Buyers Bring Big Down Payments | Realtor Magazine

Co-buyers—multiple unmarried buyers listed on the sales deed—are bringing some of the highest down payments to settlement, according to ATTOM Data Solutions’ First Quarter 2018 U.S. Residential Property Loan Origination Report.

The average down payment for homes purchased by co-buyers in the first quarter was $56,911—46 percent higher than the average down payment of $38,915 for homes purchased by other buyers. The average co-buyer brought 15.3 percent of the average sales price to settlement; the average home buyer brought 11.4 percent in the first quarter, according to the analysis. 

“Given that median down payments rose more than four times as fast as median home prices over the past year, it’s not surprising that home buyers are increasingly getting help from co-buyers—often in exchange for a share of their home’s future equity,” says Daren Blomquist, senior vice president at ATTOM Data Solutions. 

Out of 184 metro areas tracked, the markets with the highest percentage of co-buyers in the first quarter were San Jose, Calif. (48.3%); San Francisco (37.9%); Seattle (27.7%); Honolulu (27.7%); and Miami (27.6%).

“Homeownership rates are still hovering around historic lows—even though lenders continue to offer more low down payment options,” says Michael Micheletti, director of corporate communications at Unison, a firm that provides down payment assistance to buyers in exchange for a share of any future increase in the home’s value. “Letting people borrow more doesn’t make buying a home more accessible or affordable. It’s not surprising that places like Seattle, the Bay Area, and other challenging markets buyers are looking at ways to increase their purchasing power, and reduce the amount of debt they are taking on. The sharing, co-buying and co-owning of a home movement will only grow as more millennials and Gen Z enter the marketplace.” 

Fed Hints at More Rate Hikes Ahead | Realtor Magazine

The Federal Reserve voted Wednesday to raise interest rates for the second time this year and indicated that it will step up the pace of interest rate hikes if economic growth continues to boom. It changed its outlook to a total of four likely increases this year. Eight Fed policy makers said they expected four or more quarter-point rate increases for the full year.

“The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2 percent objective over the medium term,” according to a Fed statement released after Wednesday’s meeting. 

The Fed’s decision to increase its benchmark rate on Wednesday was the sixth quarter-point increase in 18 months. In a unanimous vote, its members raised the federal funds target rate to a range of 1.75 percent to 2 percent. 

The Fed’s rate is not directly tied to mortgage rates but does tend to have an impact. Lawrence Yun, chief economist of the National Association of REALTORS®, said in a statement that the raise in the Fed’s short-term interest rates will likely have an impact on what borrowers will be paying for mortgages. 

“We are still in the middle innings of rising interest rates … mortgage rates will consequently continue to nudge higher,” Yun says. “Fortunately, the economy is strong and wages are rising. If housing supply can be increased through more building, then the negative impact of rising interest rates can be mitigated.” 

The course of interest rate hikes will still likely remain gradual, but the Fed is showing a more aggressive stance at tightening its policy. Unemployment fell in May to the level the Fed had originally forecast for the end of the year. U.S. growth is also getting a boost from $1.5 trillion in tax cuts and a $300 billion in federal spending. 

“Economic activity has been rising at a solid rate,” the Federal Open Market Committee said in a statement. “Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly.” 

Mortgage Delinquencies Fall to 11-Year Low | Realtor Magazine

Fewer homeowners are falling behind on their mortgage payments. Only 4.3 percent of mortgages in March were in some stage of delinquency (30 days or more past due, including those in foreclosure), according to the Loan Performance Insights Report, released Tuesday by CoreLogic. The March foreclosure inventory rate—which reflects the share of mortgages in some stage of the foreclosure process—was 0.6 percent, which is the lowest rate of that month in 11 years. 

“Unemployment and lack of home equity are two factors that can lead to borrowers defaulting on their mortgages,” says Frank Nothaft, CoreLogic’s chief economist. “Unemployment is at the lowest level in 18 years, and for the first quarter, the CoreLogic Equity Report revealed record levels of home equity growth with equity per owner up to $16,300 on average for the year ending March 2018.” 

But economists warn that delinquencies could rise in the coming months. 

“As we enter the summer, the risk of hurricane and wildfire damage to homes increases as does the risk of damage-related loan default,” says Frank Martell, president and CEO of CoreLogic. “Last year’s hurricanes and wildfires continue to affect today’s default rates. Serious delinquency rates are more than double what they were before last autumn’s hurricanes in Houston, Texas, and Naples, Florida. The serious delinquency rates have also quadrupled in Puerto Rico.” 

74 Arrested After Wire Fraud Investigation | Realtor Magazine

Federal authorities announced Monday that an investigation resulted in 74 arrests of people in the U.S. and overseas who allegedly took part in schemes to intercept wire transfers from businesses and individuals, including in real estate transactions. Federal authorities seized nearly $2.4 million and recovered about $14 million in fraudulent wire transfers. 

The arrests were made as part of a six-month investigation, dubbed Operation Wire Wire, that was coordinated by a multiagency task force, including the U.S. Department of Justice, U.S. Department of Homeland Security, U.S. Department of Treasury, and U.S. Postal Inspection Service. Over the last two weeks, the agencies have arrested 42 people in the U.S., 29 in Nigeria, and three in Canada, Mauritius, and Poland. 

The agencies investigated “Business Email Compromise” schemes, where hackers attempt to gain access to email accounts of employees. The scams also involved some real estate transactions. For example, a hacker pretends to be a real estate professional, gains access to the person’s email account, and requests that real estate buyers wire their funds unknowingly to fraudulent accounts. Two years ago, the National Association of REALTORS® and the Federal Trade Commission issued a warning to real estate professionals and consumers that scammers were attempting to pose as real estate professionals and title insurance companies to try to dupe them out of their down payment and closing costs.

The Threat of Wire Fraud is Real

Among the recent arrests, a 25-year-old Fort Lauderdale, Fla., man was detained because he is accused of gaining access to email accounts belonging to a Massachusetts real estate attorney and sending emails to recipients that “spoofed” the attorney’s account. In one case, the man allegedly instructed an email recipient to transfer nearly $500,000—that was intended to be used for a payment in a real estate transaction—to a fraudulent account.

“Fraudsters can rob people of their life’s savings in a matter of minutes,” Attorney General Jeff Sessions said in a statement. “These are malicious and morally repugnant crimes. The Department of Justice has taken aggressive action against fraudsters in recent months, conducting the largest sweep of fraud against American seniors in history back in February. … We will continue to go on offense against fraudsters so that the American people can have safety and peace of mind.” 

3 Tenant Screening Checks Landlords Fail to Do | Realtor Magazine

Tenant screening is more than a credit or background check. But many landlords are failing to gather critical documentation that could help avoid approving tenants who later default on their rent, need to be evicted, or have other problems that cut into a landlord’s profitability, according to a new survey by the American Apartment Owners Association of more than 1,100 of its members. 

Thirty-seven percent of landlords fail to collect paycheck stubs; 67 percent don’t ask for Social Security cards; and 20 percent never ask to see a driver’s license, the survey found. But all three are critical to screening tenants and avoiding losing “thousands” in lost rent, the AAOA says in its report. 

The AAOA urges landlords to collect paycheck stubs to help determine if the tenant can really afford the rent. “The lower their debt-to-income ratio, the higher the risk of a tenant defaulting on rent,” the AAOA notes in its report. 

Further, the AAOA notes that a Social Security card remains the best form of identification. It shows the state in which it was issued and the tenant’s legal name. “Most importantly, should your tenant skip town and leave owing you rent, you will have a much higher chance of collecting that debt through a collection agency if you have [their] Social Security number,” the report notes. “In many cases, you can also use the [number] to trace the tenant’s new whereabouts to serve them a court summons as well.” 

Likewise, a driver’s license also provides another layer of identification, including the date of birth and their most recent address. “These pieces of information are crucial when conducting a criminal and eviction background search,” the report says. 

Homeowner Equity Growth Streak Continues | Realtor Magazine

Homeowners with a mortgage saw their equity rise 13.3 percent year over year, according to CoreLogic’s Home Equity Report for the first quarter of 2018, released Thursday. The average homeowner gained $16,300 in home equity between the first quarter of 2017 and the first quarter of 2018. That is the highest growth in home equity in four years. 

“Home-price growth has accelerated in recent months, helping to build home-equity wealth and lift underwater homeowners back into positive equity,” says Frank Nothaft, CoreLogic’s chief economist. 

Western states saw the largest uptick in home equity. California homeowners gained $51,000 on average in home equity, while Washington homeowners saw about $44,000 on average, in equity.

“Home equity balances continue to grow across the nation,” says Frank Martell, president and CEO of CoreLogic. “In the far Western states, equity gains are fueled by a long run in the home price escalation. With strong economic growth and higher purchase demand, we expect these trends to continue for the foreseeable future.” 

Is Break in Rate Hikes Significant to Buyers? | Realtor Magazine

For the second consecutive week, mortgage rates decreased as the 30-year fixed-rate mortgage fell two basis points to average 4.54 percent, Freddie Mac reports. Rates had been on a steady incline for weeks before breaking trend.

“Home buyers have taken advantage of the recent moderation in rates, which led to a 4 percent increase in purchase applications last week,” said Sam Khater, Freddie Mac’s chief economist. “Although demand has remained steadfast against the backdrop of this year’s higher borrowing costs, it’s important to note that the growth rate of purchase loan balances has moderated so far this year—and particularly since March. This slowdown indicates that buyers are having difficulty stretching to keep up with the pace of home price growth. … Listings for new and existing homes need to increase in the months ahead to moderate price growth and reignite sales activity.” 

Freddie Mac reports the following national averages with mortgage rates for the week ending June 7: 

• 30-year fixed-rate mortgages: averaged 4.54 percent, with an average 0.5 point, dropping from last week’s 4.56 percent average. Last year at this time, 30-year rates averaged 3.89 percent. 
• 15-year fixed-rate mortgages: averaged 4.01 percent, with an average 0.4 point, falling from last week’s 4.06 percent average. A year ago, 15-year rates averaged 3.16 percent. 
• 5-year hybrid adjustable-rate mortgages: averaged 3.74 percent, with an average 0.4 point, falling from last week’s 3.80 percent average. A year ago, 5-year ARMs averaged 3.11 percent. 

Loan Demand Surges on Lower Rates | Realtor Magazine

Mortgage applications reversed course and posted an increase last week, as homeowners and home purchasers sought to take advantage of the lowest rates in six weeks. Mortgage application volume—for home purchases and refinance applications—rose 4.1 percent last week on a seasonally adjusted week-over-week basis, the Mortgage Bankers Association reported Wednesday. Volume, however, is still 2 percent lower than a year ago. 

Broken out, applications to refinance rose 4 percent last week, but remain 17 percent lower than a year ago, when interest rates were much lower. Applications to purchase a home also rose 4 percent last week and are now 9 percent higher than a year ago. 

The average 30-year fixed-rate mortgage fell to 4.75 percent last week, after averaging 4.84 percent the week prior. This marks the lowest rate since the week ending April 20, the Mortgage Bankers Association reports. Mortgage rates loosely follow the 10-year Treasury bond yield. 

“Concerns over Italy’s political turmoil and questions about the possible imposition of trade tariffs by the U.S. on its major trade partners pushed Treasury rates lower this week,” says Joel Kan, an MBA economist. “While the level of refinance activity remains historically low, the reprieve in rate increases may have stopped the slide.”

Mortgage rates did start to move higher again as this week began. More buyers are turning to adjustable-rate mortgages due to the overall rise in rates over the past year. The share of ARMs increased to 7.1 percent of total mortgage applications, the MBA reports.

“While rates are like any other financial instrument whose future can’t be predicted, they do tend to pause and congregate at some levels more than others,” Matthew Graham, chief operating officer at Mortgage News Daily, told CNBC. “We’ll often see rising rates repeatedly run into a ceiling that goes on to become a floor in the future.”

Homeownership Still Vital to Build Wealth | Realtor Magazine

Homeownership remains a major component to financial security and continues to be the largest asset of the majority of households in the U.S. Primary residences account for a quarter of all household wealth, according to data from the Board of Governors of the Federal Reserve System’s Survey of Consumer Finances. 

“Homeownership is a primary source of net worth for many Americans, and is an important step in accumulating personal financial assets over the long term,” says Randy Noel, chairman of the National Association of Home Builders.

In the fourth quarter of 2017, households in the U.S. saw a record $14.4 trillion of equity in their homes. However, the homeownership rate in recent years has slipped below its 25-year average. In the fourth quarter, it was at 64.2 percent compared to its historical average of 66.3 percent. 

“We must continue to address the obstacles that remain for many potential home buyers,” Noel says.

June marks National Homeownership Month, and REALTOR® associations are reinforcing their commitment to protection homeownership and making it more affordable, attainable, and sustainable.

“REALTORS® pledge to continue to lead efforts that the dream of homeownership is not only possible, but very real, for any and all who want to achieve it, so they can have a place of their own to make memories, start growing their financial future, and build strong communities,” says Elizabeth Mendenhall, president of the National Association of REALTORS®. For resources to mark National Homeownership Month, visit NAR’s Homeownership Matters.