What is equity?

The equity in your home is the difference between its market value and the balance on your mortgage. In other words, equity is the wealth built up in your home over time. If you could sell your home for $400,000 and the amount you owe on your mortgage is only $100,000, then your equity is $300,000.

Equity is built in three ways: down payment, mortgage payments, and market gains. Making a down payment is a reduction in your mortgage amount, giving you instant equity in your home. Making house payments increases your equity as well, since every payment includes a portion for interest and a portion that reduces the amount of your loan amount (called the principal). Over time the amount of your payment that goes toward the principal increases and helps to build your equity even faster.

Market Value Appreciation

You also build equity as your home gains in value over time; this appreciation in market value can mean that you build equity simply by owning your home. Of course there are no guarantees that real estate values will continue to rise, but historically this has been the case. If your home is worth $250,000 and the market appreciates by 5% each year then after just two years you could add $25,000 in equity simply by living there.

Equity doesn’t have to be an abstract concept; you can turn it into cash by applying for a home equity loan which uses the equity in your home as security and in many cases allows you to deduct the interest from your taxes, just as you do with your first mortgage. Home equity loans are usually a cheaper source of funds than other types of credit (credit cards, for example) and can be an excellent way to pay for home renovation or to consolidate debt.

Mortgage rates continue to fall, with fixed-rate mortgage rates reaching new record lows last week for the second consecutive week, Freddie Mac reports in its weekly mortgage market survey.

“Fixed mortgage rates continued to ease somewhat this week to record lows and should help the ongoing housing recovery,” said Frank Nothaft, Freddie Mac’s chief economist.

Here’s a closer look at mortgage averages for the week ending early due to the holiday on Nov. 21:

• 30-year fixed-rate mortgages averaged a new low of 3.31 percent, with an average 0.7 point, dropping from last week’s 3.34 percent average. A year ago, 30-year rates averaged 3.98 percent.
• 15-year fixed-rate mortgages averaged a new record low of 2.63 percent, with an average 0.7 point, dropping from last week’s 2.65 percent average. Last year at this time, 15-year rates averaged 3.30 percent.
• 5-year adjustable-rate mortgages averaged 2.74 percent, with an average 0.6 point, holding the same as last week’s average. Last year at this time, 5-year ARMs averaged 2.91 percent.
• 1-year ARMs averaged 2.56 percent, with an average 0.5 point, rising slightly from last week’s 2.55 percent average. A year ago, 1-year ARMs averaged 2.79 percent.

Source: Freddie Mac

By Jill Krasny

As the housing market slowly improves, more consumers are finding themselves in the market for a new home, or at least one worth dreaming about.

One place they start their search is an open house tour, though they can forget these are helpful for more than just checking out the kitchen’s color scheme.

Open houses are a smart way to gauge whether a listing’s catching heat and if it’s worth seeing again in a private showing.

“If you’re just getting started with the process, an open house tour is like a get-out-of-jail-free card,” says Zillow.com real estate expert Brendon DeSimone. “It’s free, you can go because there aren’t restrictions and it’s a great way to learn the market.”

To his mind, the primary thing that home shoppers overlook tends to be the most obvious: the crowd. Observing other shoppers is key, he says, as that’s the best way to gauge the market’s response to the home.

“If you like the house, watch the people. Is it packed? Are they hovering around the agent?,” he says. If so and if they’re asking pointed questions as well, you can bet that there’s serious interest and the listing is going to go fast.

Another strategy is to observe the agent, he adds.

“If you go to a house and you like it but no one’s there, maybe there are issues there,” says DeSimone. “You should watch the listing agent’s reactions because he wants to see the response to the house and how crowded it is.”

And don’t miss the opportunity to ask the agent about the seller.

“You should ask why he’s selling, nothing rude, just what’s the story,” DeSimone says. “What’s their motivation to sell?” That should give you a feel for the pricing and whether the listing is gathering dust.

Questions like, how many days has the home been on the market?, or Have you lived here for a long time? should get the conversation going. Perhaps there’s a looming job transfer, or the seller is just moving down the street.

“If they’re not motivated you won’t want to waste your time,” says DeSimone. But at least you’ll know where they stand.

Source: “Open Houses: How to Gauge the Market on a Home Tour” Business Insider (Oct. 11, 2012)