Here’s some uplifting news during a time of so much turmoil: real estate values are on the rise in many parts of the country. In Massachusetts, single-family home prices were up about 8.2 percent in July 2020 from July 2019 prices, according to the Warren Group, a real estate and financial information research firm.
Low interest rates, market appreciation, and more buyers than sellers (also known as a "sellers market") can be welcome news for homeowners, especially during a time when there are so many financial challenges for many. Greater home equity means more value in your financial holdings.
Here are four things to think about if you want to take advantage of increased equity in your home:
Say Goodbye to PMI
You might be able to eliminate your PMI, which stands for private mortgage insurance, if you have it. Mortgage holders are generally required to pay private mortgage insurance when their down payments are less than 20 percent of the appraised home value.
This is a potentially generous benefit of rising home values. If you’ve owned your home for more than five years and your loan balance is less than 80 percent of the home's value, you have a good case for canceling your PMI.
Losing your PMI could amount to a healthy savings. In general, mortgage insurance costs about 0.5 to 1.5 percent of your loan amount per year. This means a $250,000 loan could be costing you $1,250 to $3,750 annually, or about $100 to $315 per month.
Remember, though, that to determine your official home value, you will need an appraisal. These can cost about $375 to $450, on average, and could be considerably more, depending on the specifics of your property. You will make this money back if you can drop the PMI, but be fairly certain that your home's increased value will make it worth your while.
Make Your Home Work for You
Been living with an outdated kitchen or wishing you had some extra cash to improve your landscaping? Rising home values can provide an opportunity for a home equity loan. The equity in your home can be used to increase your home's value even more. Since home equity loans tend to have much lower interest rates than credit cards have, it's a smart solution to fixing kitchens stuck in the 90s and creating spectacular curb appeal. Bonus: the interest paid on these home improvement projects with a home equity loan or home equity line of credit (HELOC) can be deducted from your taxes when you itemize your deductions*.
Keep in mind some projects nearly pay for themselves in resale value. These high-value improvements are surprising: garage door replacements, manufactured stone veneers, and even a minor kitchen remodel all have high recoup rates.
But remember: this is still a loan that must be repaid, which will add to your monthly expenses.
Check That You're Adequately Insured
If your house is worth more, you'll need to adjust your home insurance policy to cover its increased value. Take a careful look at your policy and check in with your insurance agent to be sure.
Be Tax Savvy
It's unfortunate, but when property values go up, so do property taxes. Also home improvements, such as a new garage, an addition, or even a fence in the backyard, can increase the assessed value of your home, which your town uses to determine your property tax. If your assessment goes up and you think it's unfair or unreasonable, you can appeal it and ask for a lower assessment. Some communities even give older Americans property tax exemptions. Check in with your local senior center for information on this and other potential cost-saving measures.
Remember: your home's value is a figure that fluctuates up and down. The prudent way to make use of any increased equity is to base decisions on your current needs and your financial situation.
* The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
Check out our free eGuide, Equity Edge: Answers to Commonly Asked Questions. This no-obligation download will help you understand the types of home equity financing available to you and give you answers to the questions you have about tapping into your home's equity. Download it today!
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