Home equity represents the portion of your home's value that you own outright, which is the difference between your home's current market value and the remaining balance on your mortgage. It is stating the obvious, that home equity is a major contributor to every homeowner's wealth creation. Therefore, it is important to protect your home equity. You will find below for your convenience some of the things you should not do to maintain equity in your home.
1). Maxing out home equity lines of credit (HELOCs)
Simply put a home equity line of credit is a line of credit secured by your home that gives you a revolving credit line to use for large expenses or to consolidate higher-interest rate debt on other loans. Using a HELOC to its maximum limit leads to higher monthly payments and increased debt. By doing so you are potentially reducing your equity and may even end up with negative equity if the value of your home was to drop in the future.
2). Frequent refinancing
Refinancing your mortgage too often can result in higher overall costs, as you reset the loan term and pay more in interest. It can also reduce your equity if you take cash out during the refinance. As a reminder, a cash-out refinance is a mortgage refinancing option that lets you convert home equity into cash. A new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash.
3). Making only minimum mortgage payments
Paying only the minimum monthly mortgage payment may extend the loan term and result in higher interest payments over time, reducing your home equity.
4). Using your home as collateral for unnecessary or non-essential debts
Avoid using your home as collateral for other loans, like high-interest personal loans or credit card debt. This can put your home at risk if you can't make the payments on those debts on time. In the same vein, refrain from using your home equity for non-essential expenses, such as vacations or luxury purchases. This can also increase your debt and reduce your equity.
5). Ignoring maintenance and repairs
Neglecting maintenance and repairs can lead to a decrease in your home's value. Regular upkeep can help preserve or increase your equity. It is stating the obvious that a well-maintained home is more likely to retain its value and appreciate over time.
6). Over-improving your home
While home improvements can increase your property's value, be cautious not to over-improve for your neighborhood. You might not recoup the full cost of your upgrades when selling. In the same vein, renovate or remodel your home strategically by focusing on projects that are likely to have a high return on investment (ROI), such as kitchen and bathroom upgrades or energy-efficient improvements.
7). Not monitoring your home's value
Keeping tabs on your home's value and the real estate market regularly can help you make informed decisions to protect your equity. Don't solely rely on the assumption that your home's value will appreciate over time. Economic downturns or changes in the local housing market can affect your equity.
8). Not having adequate homeowners’ insurance
Ensure you have sufficient homeowners’ insurance coverage. Inadequate insurance could leave you financially vulnerable in the event of damage or loss to your home.
To conclude, remember that building and preserving home equity is a long-term financial goal. To protect and increase your home equity, make informed financial decisions, budget wisely, and consider consulting with a financial advisor to develop a strategy that aligns with your financial objectives.