Two terms, appreciation and increased home equity will keep on cropping up frequently when you are looking to invest in a house of your own. While these are primary reasons for investing in real estate, it need not be the only consideration for investing in a home to live in.
Investment in real estate implies buying a property for reselling at a profit but buying a home is basically meant for comfortable living and the long term security it provides. One does not invest in a home with the idea of reselling. But the irony is that USP of real estate agents usually focuses on investing in a ‘dream house’ even if amounts to taking a home loan that you can ill afford to repay. The punch line is that one can always sell because of appreciation and increased home equity.
I would like you to ponder here and think: does anyone buy his or her dream home with the thought of selling it?
What is even worse is that the terms, appreciation and home equity are not properly understood by a vast majority of gullible first time home owners.
- Appreciation
Appreciation is the increase in value of the property. While people normally talk about the value of their house having appreciated, the truth is that the appreciation is only in the price of land. The value of your house doesn’t appreciate, it actually depreciates. Despite your meticulous attention to repair and maintenance of your house, its value is not going to appreciate. It is the land on which it is built that appreciates in value.
- Home Equity
Equity is ownership interest. You may have bought your house for $100, 000 but your equity is the present market value of the asset. In the event you have any claims against it, for example a mortgage, then your equity is market value less the amount you owe on your mortgage. If your house property is presently worth $150,000 and you still owe $70,000 on your mortgage, your equity is $80,000. Increased equity works out like this.
Suppose you had paid $20,000 as down payment and borrowed $80,000. You still owe $70,000 to the lender, which means you have paid $10,000 as principal plus interest. Let us assume the interest element till date to be $5,000.
This means that you have paid $20,000 (down payment) plus $10,000 (principal paid back) plus $5,000, which equals $35,000. If you were to sell your home now for $150,000, the lender gets $70,000 out of it and you get $80,000. So your notional profit is $80,000 minus $35,000 or $ 45,000. It is notional because it doesn’t always work out like that. When you are in a hurry to sell you never get the market price for your property.
Buying a house simply on the basis of expected appreciation and increase in home equity is fraught with danger due to other reasons as well.
- You may buy property in the most posh area of the city and still not experience any appreciation in land price. There is a strong possibility that the price of land in prime locations has already appreciated to optimal levels leaving little or no scope of future appreciation.
- Land prices are very sensitive to change in the political, economic and social scene.
- It is a misnomer that land prices always appreciate. The reality is that land prices move in cycles. Only expert realtors know the current cyclic phase and they are hardly likely to share such information with a naïve first time homeowner.
The only criterion for buying a home should be your ability to pay for it. If you think that you have adequate funds for the down payment and you will somehow manage to pay monthly installments of home loan then you are buying trouble for yourself.
Home loans are secured loans. Many home loan providers will readily approve your loan application even if you have a not-so-perfect credit history, albeit with a higher rate of interest. But are you ready to bear the burden? The lending company has the option of foreclosure but what are your options?
The recent subprime crisis in USA should be an eye-opener for everyone looking to buy a home without doing proper homework. Loan applications are easy to fill up and getting home loans sanctioned is easier than other personal loans. The most difficult part in home loan, as with any other loan, is repayment.
Before deciding to buy your dream home and signing on the dotted line for a mortgage make sure that you have done the figures properly and accurately. It requires taking into account your present income; the inflation factor, expected future income, existing monthly commitments and any increase in expenses, for example due to a decision to start a family. You cannot afford to be negligent on this count. Any laxity in this regard may see you facing foreclosure proceedings earlier than you think.
It is advisable that you buy your home only when you are sure that you have the wherewithal to meet your monthly commitments, including payments for the home loan you are contemplating. Ideally, your present and expected future income should allow creation of an emergency fund as well.
The sad part is that we all tend to get lured by marketers and do take decisions in a hurry. There is also an element of misfortune involved. No one knows what surprises life has in store for us. Despite proper homework and due diligence, adversity does strike when we least expect it to.
In the unlikely event of a foreclosure notice you have several options available to you to stop it. Don’t think that it is the end of the world because it is possible to prevent a foreclosure. What you require to do is to take timely action before the lending company closes the door for negotiations. Hire a reputable professional and learn about foreclosure prevention. Get your home loan modified and bide your time till things change for the better.
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