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Your home equity represents the current market value of your home minus the liens (mortgages) that are attached to the property.

Home equity increases when the value of the home increases and when mortgage principal is paid that reduces the mortgage balance.  In a sense, home equity represents savings that the homeowner has accumulated.  Home equity decreases when the value of the home declines or when a homeowner takes out a loan against the property.  When a homeowner uses their equity, they have made a financial decision to achieve a financial goal or objective today rather than wait to utilize it a later date (such as when they sell the property).

Many people believe that they cannot or should not use their home equity.  First, a homeowner can access and use their home equity when and how they choose subject to qualification guidelines.   Secondly, the question of whether a homeowner should use their housing equity to meet financial or non-financial needs is an individual decision that is unique to their circumstances.  There are good uses of home equity and there are certainly poor uses of home equity.

The key point is that home equity is an asset of the homeowner (for many it is their largest asset) and can be used by the homeowner for any purpose they choose.  After all, it is their money. Among the reasons people choose to use their home equity are the following:

  1. Obtain a mortgage with better terms and/or a lower payment
  2. Obtain cash to meet a financial obligation or need
  3. Make home improvements
  4. Pay off other debt with high payments and interest
  5. Make investments that may provide a better financial return
  6. Meet educational expenses for children
  7. Meet medical or long-term care expenses
  8. Establish an emergency fund

Because the interest rate on any borrowing association with a home is lower than the interest rate on a credit card, a car loan, or other personal loans, using home equity can have significant benefits compared to utilizing any other type of borrowing.  Additionally, utilizing home equity can be a more effective and tax-efficient way to access needed funds than withdrawing funds from a savings account, an investment account, or a retirement account.  Lastly, a unique benefit of using home equity is that borrowing against home equity is not subject to income taxes and the interest paid on any type of home equity borrowing can be tax-deductible under certain circumstances.

Home equity management refers to the process of using equity extraction via loan at favorable and tax-advantaged interest rates to invest or manage cash flow in manner that offers higher returns and cash flow.

Following are the most common strategies to access home equity:

  1. Rate and Term Refinance
  2. Cash Out Refinance
  3. Home Equity Line of Credit
  4. Fixed Home Equity Loan
  5. Home Equity Conversion Mortgage

Each of the above strategies have pros and cons and may not be appropriate in some circumstances and may not be suited to all homeowners.  However, when used correctly they each can provide significant benefits.  For example, with a Home Equity Conversion Mortgage monthly payments are optional and there are unique features that can benefit married individuals who are over the age of 62.

As stated earlier there are many financial and non-financial reasons why a homeowner may want or choose to use the equity in their home.  Our role as mortgage advisors is to help our clients understand the options that are available to them if and/or when they want to determine if using their equity is right for them.  We work with them to explain the pros and cons of each option and provide the information that they need to determine whether utilizing their home equity, their asset, is a good financial option.

A Quick Look Back

Home prices declined in the Denver metro area from 2007 through 2011. However, the real estate market in Colorado and the Denver metro area has been on a tear since 2012. Honestly, the real estate market has performed better than most people realize.

For anyone who purchased residential real estate during this period made an excellent investment, not to mention that, in most cases, they are also purchasing a place to live.

Similarly, the cost to rent increased over 40% during the past five years. However, in the last six months of 2017, rental rates declined slightly, yet they remain at all-time highs.

For most, owning a property has clearly been a better option when it comes to building wealth over the past five years.

Where Do We Go Now?

During 2017, the rate of appreciation in the Denver metro area slowed. At the end of September 2017, the annual rate of appreciation had slowed to 6.83%. Based on anecdotal data, the market was somewhat flat during the 4th quarter of 2017, with inventories hitting all-time lows along with the holiday season.

The current forecasts for the national real estate market are very optimistic, largely based on the accelerating economic growth in the U.S. economy and the U.S. employment market. The forecasts for the local real estate market are a little mixed.

Some believe that 2018 will look a lot like the second half of 2017, with more modest price increases, in the 5% range, and more in balance between buyers and sellers. Under this scenario, the market is still healthy, but not as crazy as 2016 and the first part of 2017.

There is another group of market analysts that believe the price appreciation in the Metro Denver housing market are based on fundamentals that have been in place for the past five years. The fundamentals are still in place at the beginning of 2018 and in some cases are more pronounced. For example:

  1. Inventories of houses on the market remain at the lowest levels in recorded history;
  2. People are still moving to Denver;
  3. The economy is healthy with substantial job and income growth;
  4. Interest rates, although rising, are still near historic lows;
  5. The rental market is not favorable, since monthly rents are very high and the vacancy rates are in the 5% range, even after all of the new building;
  6. There is an imbalance in the market between the types of houses available for sale or that are being built (high-end) versus the types of houses people would like to purchase (low-to-moderate-priced housing). This tends to put upward pressure on the low-to-moderate price ranges.

I am in the camp that believes that fundamental such as supply and demand are the real drive for the real estate market in Metro-Denver. Therefore, I believe the market will perform in a manner similar to 2017 barring any changes to the current economic outlook either locally or nationally.

Interest Rate Forecast

Conventional mortgage rates ended 2017 at approximately 4% for a 30-year, fixed-rate mortgage. Rates are down from where they started in 2017, even though the Federal Reserve increased the short-term rate three times last year. It is expected that the Federal Reserve will raise the federal funds rate by a quarter point three times in 2018. Most projections right now estimate that 30-year mortgage rates will end the year in the 4.5% range after the increases by the Federal Reserve and assuming there are no other surprises or unexpected events that affect the economy or expectation regarding inflation.These rising rates should force anyone who currently has an adjustable-rate mortgage to seriously consider refinancing to a fixed-rate mortgage and, where possible, go to a shorter term in order to get a better interest rate.

Other Mortgage and Real Estate News

The new tax bill that was passed in December will impact the real estate and the mortgage industry in the following ways

  1. The increase in the standard deduction means fewer people will itemize deductions, thereby decreasing the benefit of the mortgage deduction;
  2. The tax deduction for property taxes is capped at $10,000;
  3. The amount of mortgage interest that is deductible is limited to the first $750,000 of mortgage debt (under prior law the limit was $1,000,000);
  4. The mortgage deduction for a Home Equity Line of Credit has been eliminated beginning in January of 2018. Going forward, accessing the existing equity in a property may be more efficient to do in one mortgage and, in many cases, it may make sense to consolidate an existing Home Equity Line of Credit with a new first mortgage.

Lastly, Fannie Mae and Freddie Mac increased the conforming limit in the Denver metro area to $529,000 starting January 1, 2018, making it easier to stay out of jumbo loan guidelines, which can be tighter and not as flexible as conventional mortgage guidelines.