Learn About Losing Equity in a House
You can lose equity in a house and later regain it. Although, in certain markets, it often takes a long time for equity to make a rebound once it is lost. You can lose equity in a home through no fault of your own. You can also lose equity in a house because you did something perhaps considered a bit risky.
People sometimes see the world through rose-colored glasses. Everything is wonderful, and they believe it will always be wonderful.
But bad stuff happens, sometimes when you least expect it. What might seem like a harmless thing could turn out awful. Here are ways you can lose equity in a house without meaning to do it:
Changing the Structure or Layout of Your Home
Not every home improvement project is well planned or wisely orchestrated. If you reduce the number of bedrooms, paint all of your walls black or convert a garage into a room addition, you might lose equity in your house.
Refinance a Home Loan by Taking out Cash
If you get cash back on a refinance, you have increased the amount of your loan. If appreciation does not keep pace or values fall, you could owe more than your home is worth, which would mean you have lost equity.
Borrowing on a Home Equity Loan
When you take out a home equity loan, you are losing your equity to financing. Your equity shrinks while your financed loans get bigger. Of course, if you use the equity loan to remodel a kitchen, for example, you might replace the equity you lost.
Deferred Maintenance Will Cause You to Lose Equity
Everything inside your home has a shelf life, including the home's exterior siding. You may need to replace the roof or windows. Appliances such as HVAC eventually wear out. If you let things deteriorate and never fix or repair anything, your equity will suffer.
Financial Markets Can Collapse
It happened before, and it could happen again. We are not immune. We survived the 2007 mortgage meltdown. However, big banks followed in 2008 and demanded federal bailouts. Homes went into foreclosure. Short sales became a household word. Short sales and foreclosures affect values of neighboring homes.
Demographics of Your Neighborhood Can Change
If criminals and thugs take over your neighborhood, for example, that can change neighborhood dynamics, alter pride of ownership and drop prices. If house prices fall, your equity goes out the window. Look at the demographics of a neighborhood before moving there. Just don't buy a house in a certain neighborhood because all of your friends are moving there.
Somebody Could Die in the House
This is not something you might think about very often but buyers do. It's a big deal for many buyers if there's been a death in the house. It's even worse if the home is stigmatized due to a tragedy. You can lose equity over it. Not every buyer is ready to buy a home if a person passed away inside the home, regardless of how peaceful.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.