What is Home Equity?

Home equity seems to be a very simple calculation—the total amount of mortgages owed subtracted from the current market value of a home. One side of the equation is well defined and it is found on the monthly mortgage statement, the loan balance, the other side is less obvious—the current market value of the property.

As a homeowner, your down payment purchases your initial equity and your monthly (or additional) principal payments increase your equity. In strong real estate markets and in-demand locations, equity can increase quite rapidly as the property value increases, but the inverse can also happen—too much available inventory and market down-cycles can lead to falling home values and a reduction in homeowner equity.

Creating Value is in Your Hands Maintaining the condition of a home is vitally important to retaining and increasing value. Homes are judged against their peers—how do they compare to similar homes in the neighborhood. Another way to retain value is to not over upgrade, since it is rare to ever recoup the money spent if you exceed neighborhood value. Keep up the landscaping and do the little things to add curb appeal.

Putting Home Equity to Work Home equity represents the largest single asset of millions of Americans, and because it represents so much of an individual’s net worth, it must be treated with respect. Home equity is not a liquid asset until a property is sold, or it is borrowed against.

How Much Equity can be accessed?

Since the financial institution is lending money and using a home as collateral, they will not lend 100% of equity. Most banks will allow a qualified homeowner to borrow approximately 80% of their equity.

 It’s Important to use Your Home Equity Wisely.

Because it is likely the biggest asset most people have, losing your home equity is hard to overcome. It must be used in prudent ways and the payments against the loan must be the loan payment is only acceptable for a short-term solution.

There are number of good reasons to use money from a home equity loan and some really bad ones.

    1. Invest in Your Home.

The best way to use the money is create more equity in the home. Among the very best returns on your investment (ROI) include kitchen and bathroom remodels, adding square footage or an extra bath, enhancing curb appeal and repairing/keeping the existing structure sound. Making prudent investments in your home is a wonderful win-win, you enjoy the upgrades and they can add value to the home.

  1. Invest in your Children’s Education.

Using your home equity to finance a child’s higher education may be the greatest pay off of all. Not only is the rate much lower than a student loan, it is an investment in the child’s future.

  1. Supplement Retirement Needs.

Older homeowners spent their working lives paying down their mortgage. At retirement, when monthly income is reduced, a home equity loan could pay for a dream vacation or an unexpected major expense.

  1. Augment the Impending Sale of a Home.

If you’re planning to sell soon, a home equity line of credit may be the best way to finance improvements, and you can pay it off entirely when you sell. Investing wisely on upgrades and repairs may even reap a profit on your investment.

 Some Not Very Wise Choices

On the flip side, adding luxury amenities like a swimming pool, hot spa, lavish landscaping, expensive appliances and exotic countertops and flooring rarely pay off.

Purchasing a car or boat or most any personal luxury items is a poor use of the funds, since these quickly depreciate in value.

Also stay away from using money on risk-heavy investments. Financing stock purchases, start-up businesses and paying routine bills is not smart. If one cannot afford to purchase those items with available funds, using equity from your home means they should not be in your budget.

Treat a home equity loan as an investment and not as extra cash when making financial decisions.

If your intended use of the money doesn’t pay you back in some way, it’s not the best use of your valuable equity.

 

We are Happy to Assist You if you would like an assessment of the market value of your home and the current equity you can access, give us a call for a comparative market analysis.

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The Spring Market: Selling Your Home in the Spring of 2017

Okay, you might have heard that it’s a seller’s market out there. That as soon as the “For Sale” sign goes up on the lawn the house is under contract. And that’s true in many areas in San Antonio. But, the goal is maximum profit in the minimum time. Selling your house fast is good, but selling your house fast at a great price is even better.

So let’s talk about how to achieve that this Spring. Maximum profit in the minimum time.

First, talk with your REALTOR.  Take them on a tour of your place, I’m talking the inside and the outside. Let the REALTOR get a great look at all the rooms, the flooring, the paint, the windows, the walkways, the yard, everything. Now, be sure to point out any improvements you’ve made.  New kitchen, point it out. Wonderful landscaping, tell your REALTOR that and also tell them when the property is in full bloom. That can make a big difference to potential buyers, so you might want to discuss putting your house on the market while the flowers, bushes, and trees are at their peak. After all, first impressions count, especially when you’re trying to sell your home. You’ll have to put some time and effort into that curb appeal.

Now it’s possible your REALTOR will also recommend decluttering your house. Now you’re not alone, that happens a lot. You might need to move out some of the huge pieces of furniture you have and put them in storage. That’s a hassle but your place might look more spacious, airy, and inviting as a result.

Now, you’ve taken your REALTOR on the tour of the house. What’s next? Try to anticipate questions that most buyers will have. Here’s a big one – how much are the utilities? People are asking that all the time. So one great idea is to get out several months worth of gas, electric, and water bills. Copy them and have them for available for potential buyers to examine. They’ll really appreciate that. Another idea is if you have any photographs of your property in different seasons, it’s a great plan to print them out and have them on display so buyers can see how the place looks in different times of the year.

Okay, ready to put up that “For Sale” sign? Well, not quite. First you’ll have to discuss some key issues with your REALTOR. One is how the house will be shown. There’s a simple reality here. The more people who see your property, the better chance you’ll have of selling it fast for the maximum price. So if you insist on “appointment only” showings or perhaps only on Sunday from 2:00 to 3:00 pm, it might take your house a lot longer to sell. A better option, make your house really easy to show. Anytime during the day, 7 days a week. That way you’ll get the most showings possible. And you never know, the buyer who desperately who wants to see your place just as you’re sitting down to dinner, that might be the person who makes an offer. Discuss it with your REALTOR and see what you both come up with.

And finally, I kept the best thing for last, discuss the potential selling price with your REALTOR. Many people have a figure in their heads about what their home is worth. For instance, you bought it for $300,000 and you built a $20,000 deck and now you expect to get at least $320,000, right?  Well maybe. But remember, the market determines your price, not the amount you put into it. What you need instead is good, hard data. Your REALTOR can tell you what comparable homes have sold for. They can also tell you what homes failed to sell because they were over priced (there’s some of that going on). But if you base your sales price on solid data, you’ll have a better chance at a successful transaction.

So there we have it. Fix the place up, get your utility bills and photos together, discuss the whole process with your REALTOR and price it right. If you do all that, you have the best possible chance of hitting that goal of maximum profit in the minimum time. And you know what, the Spring market of 2017 might be the best one ever for you.

 

The Tax Benefits of Home Ownership

Tax time. There’s just a little over one month left before your Federal income tax return is due. The vast majority of Americans will file between now and April 18th. That’s right, this year it’s not April 15th, the deadline is the 18th. So you have a few extra days.

Did you know that home ownership can make your Federal tax bill smaller, that’s right, smaller.

Uncle Sam understands how critically important home ownership is to creating a vibrant and healthy economy. It’s one reason why the Federal government has included many financial incentives in the tax code to encourage home ownership.

If you bought a new home in 2016, dig out your settlement sheet. On that document you’ll find some great tax deductions. First, any points you paid to get a better rate on your loan are deductible. If you paid one point on a $100,000 loan you can subtract $1000 from your taxable income. If you refinanced your home this year you can also deduct the points but they have to be spread out over the life of the loan. If you paid less than 20% down you probably have to pay mortgage insurance premiums. If your home loan was originated after January 1, 2007, then that PMI may be tax deductible. Odds are your PMI payment is wrapped up in your monthly mortgage payment. There may be other deductions in there as well. When you pay your mortgage each month, you’re really paying 4 things: principal, interest, taxes, and insurance. You’ve probably heard it called PITI. The property taxes you pay are tax deductible. The mortgage interest deduction allows you to take all the interest you paid on your loan each year and knock it off your taxable income. This is the most beloved of all tax deductions.

If you work from home, you could qualify for a home office deduction. It just has to be your primary place of business and the room has to be dedicated as your workspace. Your kitchen table can’t also be your desk.

The tax benefits continue when you sell your house. This is a big one. If you sell most investments and make a nice profit your capital gain would cost 15 to 20% in taxes. When you sell your home — different rules. The capital gains exception allows people who sell their home and pay NO taxes on up to $250,000 in profit if you’re single and up to $500,000 if you’re married. That’s a lot of money you can save. The home will have to be your primary residence for 2 of the last 5 years and some other requirements as well.

Discuss these rules with a tax professional before you claim any of these deductions.

You see, there are tax benefits to home owners at every stage of the process. When you buy the place, when you live there year after year, and eventually when you sell it. These tax benefits represent big savings, not pocket change, and they’re only for home owners. Another good thing is that it doesn’t matter what kind of home you have — single family home in the suburbs, high-rise condo downtown, or even a one room cabin in the Hill Country, if it’s your home, you’re on tract for some big tax savings.

If you think about it, as homeowners, we celebrate so many special days in our home every year. There are birthdays, Thanksgiving, Christmas, Hanukkah, not to mention Valentine’s Day, Mother’s Day, Father’s Day and many more. But the one day we DO NOT celebrate is Tax Day. We could, even though there’s no big game, no big meal, and no big party that day. There might be big tax deductions, big tax credits, and big tax exemptions. All that might be worth raising a glass on Tax Day to the one thing that makes all of those things possible — this wonderful thing called your house.

One last word — Don’t forget, this is the weekend you change your clocks. Spring forward, set your clocks ahead one hour forward this weekend. You’ll lose one hour of sleep, but you’ll have one extra hour of daylight to get stuff done.