Did you get your share of the estimated $1.2 trillion in equity growth that American homeowners reaped in the past 12 months? Do you have at least a rough idea of how much equity you’ve got? Is it a big deal to you financially?
Such questions are especially relevant in the wake of the Federal Reserve’s frothy new estimates, which put total home-equity holdings nationwide at $12.5 trillion — a stunning doubling between 2011 and the final quarter of 2015.
Equity is the difference between your mortgage balance and the market value of your property. If your house or condo is worth $350,000 and you’ve got $200,000 in mortgage debt against it, you’ve got positive equity of $150,000. If the house is worth $350,000 and you’ve got $400,000 worth of mortgages on it, you’re underwater by $50,000.
Although the vast majority of the country’s houses with mortgages have positive equity, roughly 4.3 million homes are underwater, mainly as a legacy of the financial crisis and the Great Recession. Another 9.5 million are what analysts call underequitied, with less than 20 percent equity, according to data from the research firm CoreLogic.
When you have minimal or no equity, your financial options tend to be limited: You may find it impossible to sell your house without having to bring lots of cash to the closing. You may also find it difficult to refinance out of an albatross mortgage that’s been around your neck for years.
And you probably can’t tap into your home’s value for help on worthy expenses. For example, you can’t take out a second mortgage or a home equity line of credit to help with tuition payments or remodeling the kitchen.
The most significant news emerging from the latest national data on equity is that things are looking up. Thanks to rising home prices and pay-downs of mortgage principal, large numbers of people previously in negative equity are crossing the line into positive territory.
CoreLogic estimates that around a million of them did so during 2015. Another half-million owners escaped from underequitied status, moving above 20 percent equity. If prices rise another 5 percent in the coming year, 850,000 more homes should see significantly broadened financial options, researchers say.
That’s great, but what does it mean for you?
Start with your knowledge of where you are equity-wise. Equity is inherently challenging to track; nobody sends you a monthly accounting. You can’t just go look it up somewhere. Recent research from loanDepot, a mortgage lender, suggests that most of us don’t have a good grasp of our home’s market worth, making equity estimates difficult at best.
Researchers found that although 57 percent of owners believe their home’s value has increased since 2012, 80 percent of them underestimate how much it has actually risen. That’s at odds with findings by Quicken Loans’ monthly analysis of owners’ estimates compared with appraisers’ reports. In its latest study,
Quicken found that owners overestimate their home values by around 2 percent.
Either way, many of us can only guess about the size of what may be our largest investment asset. Bryan Sullivan, loanDepot’s chief financial officer, says this is especially the case for people who purchased during the housing boom, watched home prices crater and since then haven’t kept up with local market changes.
They have “regain[ed] equity many thought was lost forever,” but also “are unclear about how to determine changes in their equity.” That, in turn, may be stopping them from making good use of their equity positions, whether to sell and move or to pull some of it out via a home equity credit line or second mortgage.
So how to keep track? Start with the part of the equation you probably know precisely because it’s sent to you monthly by your lender: your outstanding principal balance. To get an idea of your market value, you can type in your address at the sites of Zillow, Redfin and others that offer automated estimates online. But beware: Local area median error rates on these sites can mangle your calculations.
If you are considering selling your home in the foreseeable future, you can contact several local realty agents who specialize in your area, level with them about your timing and ask for their best estimates. Or you can hire a local real estate appraiser. It’ll cost you some money, but if you seriously want a benchmark on your equity, either of these two options would be the way to go.