Is Equity Really Important?
Like most real estate news, positive reports are typically followed by negative ones. Just last week alone, there was a report from CoreLogic stating that more than three million homeowners regained positive equity since the start of this year. While this should be seen as a positive, it was accompanied by data that over six million homeowners, 13% of all properties with a mortgage, are still underwater. The idea of equity and how important it really is can be debated and argued. The answer lies with what the homeowner’s intentions are and how well they are managing the monthly payment.
Equity is a snapshot in time of the current property value in relation to how much is owed on any liens with the property. Your equity will change with every monthly payment you make and every time there is a sale in your neighborhood. The more money you put down, the more equity you have at the outset of your loan. However, that doesn’t mean it will stay that way forever. As we have seen from the mortgage crisis, equity can come and go pretty quickly and nothing is ever set in stone.
Equity is important if you are looking to maximize profits for an upcoming sale or if you are planning to sell in a short period of time. If you are living in your dream house with no intention of going anywhere anytime soon or tapping into equity for any reason, equity is nothing more than a running scorecard of a game than won’t end until the mortgage is paid off. It is nice to have equity to cash out in case of extreme emergencies, but other than piece of mind, it shouldn’t have a tremendous impact on how you view your property.
There are many investors who got their start investing renting the house they were living at when the property became underwater. Some five years later that same property may still be at or close to underwater, but they are seeing positive cash flow every month and have paid down their mortgage over the past five years. If their intention is to keep this going, their property value will have little to no impact on what they can charge for rent or anything else they do with the property.
The market is constantly fluctuating and unpredictable. If you are crossing the months off your calendar until you have enough equity to sell, you could be waiting much longer or shorter than you think. The best plan is to go into a property with either a short term plan under six months or a three to five year strategy. If you bought a buy and hold property, then don’t get caught up in what the market is doing today and where your value is. Make any changes or improvements with long term thinking in mind and what will add the most value 10 years from now.
Sooner or later the market will shift and values will go up. Until then, it doesn’t do you any good to try to track exactly how much equity you have on a month to month basis. The only time equity is really important is when you are thinking about selling. If you have the right property, that may not be for many years.
By Than Merrill