Market Insights

What can change your home equity?

Family on their couch in a home that is increasing in value.

Equity is the difference between the market value of your home (what it could sell for) and the amount you still owe on your mortgage.

Home equity can change in two ways: either through changes in the market or through changes in investment in the home to impact the loan balance. Homeowners always hope for appreciation in their market value to drive equity up.

What makes home equity go down?

The expression “what goes up must come down” usually doesn’t apply to real estate value and home equity. Nevertheless, specific changes by homeowners or external changes in the market can cause equity in real estate to drop.

Consider these possible reasons of losing equity in your home:

Low value of comparable properties. If homes comparable to yours in the area (“comps”) are not attracting desired sale prices, the market value appraisal will reflect these lower values.
Home condition. A run-down, old-looking home is valued lower than a well-maintained, attractive property with modern appeal.
Neighborhood appeal. Neighborhoods may be less attractive and lose market value for reasons such as declining school reputation or loss of specific amenities.
Glut in the market. If the supply of homes in a neighborhood exceeds the demand, prices will drop.

Homeowners can help prevent the decline of their own property with maintenance and upgrades. If a homeowner has enough equity available already, a home equity loan can help to finance improvements that may increase the value of a house. However, by taking out a loan against the equity in a home, the value of the equity available will drop by the loan amount until it is paid off.

While they cannot generally have as much impact on their neighbors’ properties and the neighborhood itself, homeowners associations (HOAs) and community development projects may help to address broader problems. Sometimes waiting out a market glut or looking for seasonal demand can allow the homeowner to get a higher price.

Home equity will also be reduced by raising the loan balance across all home-related loans.

This may happen if the homeowner:

Refinances the mortgage for a higher amount
Takes out a home equity loan
Activates a home equity line of credit (HELOC)
Pursues a reverse mortgage

The first three loan situations are set up so that the homeowner will resume increasing equity with payments on the loans.

What makes equity go up?

A homeowner can increase market value by making improvements to the home, but the value retained at resale generally isn’t 100% of the overall project cost.

Remodeling websites can provide helpful reports of cost vs. value for numerous projects ranging from attic insulation and door replacement to kitchen remodels and additional stories. Renovations that improve curb appeal don’t just impact the market value, but also can get more people in the door to see the property when it is up for sale.

Homeowners can finance improvements with a home equity loan from Discover® Home Loans. These loans come with low, fixed rates, and it takes minutes to apply online.

If the market value stays the same, payments toward the loan will generally increase equity. Depending what different lenders offer, keep in mind these situations:

Some loans are amortized with higher interest payments and lower principal payments up-front, so equity increases slower early in the loan than later in the loan.
If allowed, extra payments made biweekly rather than monthly can be applied to principal, increasing equity more quickly.
Paying off a shorter-term loan (e.g., 10-year) will build equity faster than a longer-term loan (e.g., 30-year).
Required payments on an “interest-only” loan will not increase equity, although extra payments may be allowed to go to principal.

How do market interest rates impact equity?

Mortgage interest rate changes can affect the size of a mortgage that a buyer will qualify for. A buyer is pre-qualified for a loan that will come with a specific monthly payment.

When rates decline, buyers can buy “more house” for the monthly payment. In addition, more buyers at lower income levels will be able to enter the housing market. Take a minute to check out rates from Discover Home Loans to get an idea of what you might expect to see for a home equity loan or mortgage refinance in today’s market.

When the interest rate goes up, the monthly payment goes up. If this causes the payment to rise beyond the pre-qualification amount, the loan will not be allowed.

Often, changes in interest rates can be as small as 0.5 percent. That one-half percent interest change may seem quite small, but its impact can be large. For example, with a fixed-rate mortgage of $300,000 at 8 percent for 30 years, a homeowner will pay $2,201 monthly, but at 8.5 percent, payment increases to $2,307.

When signs begin to indicate that the Fed is raising interest rates, the housing market often sees an increase in activity, with home buyers trying to beat the change in the rate.

Home sellers may offer incentives to help buyers make the purchase to have a faster sell, knowing that there will be a slight stall in buying immediately after the rate hike. This potential drop in market price corresponds to a decrease in equity.