Potential homebuyers have been left behind by rising interest rates on mortgages. This has weighed on the U.S. market, with home prices experiencing five consecutive months of declines according to the Case-Shiller National Home Price Index.
Market conditions could cause your home to lose value or slow down its appreciation. If prices drop, your home equity could be affected. This is the difference in what you owe and what it is now worth.
However, this is not a cause for concern unless you are looking to tap into your home equity and/or sell your home soon.
We will discuss the reasons your home may be losing value and what steps you can take to increase your equity.
The key takeaway: If you don’t plan to sell your home or borrow against it soon, there is probably no reason to worry about a slight decrease in its value.
Why your house value could drop
There are many factors that can impact the value of your house, including some that you cannot control. These are the most common reasons home values drop.
- Mortgage rates Since March 2022, the Federal Reserve has increased its benchmark interest rate eight more times. This has put upward pressure on mortgage rates. Rising mortgage rates can decrease demand which could lead to a decline in home prices.
- Housing market values are influenced by local market conditions. Demand and supply. A Zillow report from 2023 states that Cleveland, Pittsburgh, and Charlotte are the hottest markets. San Jose, Sacramento and Minneapolis will cool down, and Denver is expected to remain in the top 5.
- Your home’s condition — Maintaining your home, including its landscaping, exterior and internal paint, and HVAC systems, will help to keep it from losing value over time.
What happens if home equity drops
Even if you intend to stay in your home for a long time, having less equity may not be a concern. It could limit your options if your equity is low and you need to sell your home soon.
What impact does home equity have on
- The declining housing market — You may lose equity if you bought during the peak of the market. However, a loss in equity doesn’t necessarily mean that you are “underwater.” A large drop in equity could cause you to owe more than your home is worth.
- Mortgage amortization — Building equity requires time. Your monthly mortgage payment will be primarily used to pay interest, rather than the principal, at the beginning of your loan term. To see how different loan terms impact your payments and what interest you will owe, use our loan amortization calculator.
- Low – If your down payment was not substantial, you could find yourself “underwater” with negative equity.
How do you build equity in your home
Two ways to build equity are to pay down your principal balance and increase your home’s value.
- Make additional payments. You may be able to pay your mortgage off early by making extra payments above the minimum. If you aren’t underwater, paying down your principal can increase your equity. This can help make a difference in the early stages of your mortgage.
- Home improvements can help increase the value of your home and build equity. Before you spend money on home improvements, it is important to understand the impact that your home has on its value.
- Choose a shorter term mortgage if you are actively purchasing a home or refinancing. A shorter term mortgage can build equity faster and help you save interest costs over the loan’s life. However, a shorter term loan will typically cost more as you have to repay the principal sooner. A mortgage calculator will give you an estimate of how much you would have to pay monthly, including insurance and property taxes.
- Wait for market conditions to improve. If equity has been lost due to a market drop, you can just wait it out. According to the Federal Housing Finance Agency, the average annual increase in home prices has been 4.3% since 1991. The average rate has been 7.7% since 2012.