The chair of the U.S. Federal Reserve, Jerome Powell, wants to “reset” the U.S. housing market. By hiking interest rates, Powell claims to be forming a more “balanced” market between buyers and sellers.
In other words, home values could be set to drop. The Federal Reserve has, in fact, admitted that a sharp drop in home prices could be coming.
Home Equity Is an Important Asset
What is home equity? It’s your property value, minus any debt you still owe against the home.
For generations, home equity has been the core of wealth for people and families. A home is the single biggest investment for the average person in the U.S. middle class. It’s a big reason we buy. So, if you are a buyer or owner, the news of a “reset” might have you opening the real estate apps, and checking your home value estimates.
So far, so good for the many owners who bought before the steep rise in home prices. Many of these homeowners are equity-rich. That is, their home’s market value comfortably exceeds the remaining mortgage debt they owe on the home.
But not everyone bought before the market surge. In any case, facing an impending “reset” market, how can owners preserve home equity?
Tip 1: When Property Values Fluctuate, Hold On.
The main way to preserve equity is to keep on making those monthly payments. Each payment reduces the loan principal and interest. Each month increases the portion of the owner’s real estate that’s paid for.
At the same time, of course, the homeowner hopes the local market won’t falter.
For those in the right market at the right time, a home appreciates in value effortlessly. In our current market? Maybe not.
But as long as its owner continues to hold on through the period of inflation, a home’s market value generally rises over the long haul. This is why preserving home equity can be easier than holding gains in stocks and bonds. Those can be too easily sold. But the typical homeowner tends to hold onto that home for dear life.
Through tough economic times, the silver lining is the way a mortgage stands up to inflation. The monthly payment due on a fixed mortgage loan costs the same no matter what inflation does. Protecting home equity is mostly a matter of staying put.
Leverage Home Equity to Invest in the Home Itself.
Some homeowners are in the position to boost their property value by redoing kitchens or bathrooms, finishing basements, or buying smart home systems. In this economy, some people aren’t able to do major renovations. But even covering old vinyl kitchen tile with laminate flooring can add value to a home.
To make the most of their equity, homeowners can check the real estate websites and look through nearby homes that have profitably sold. Interior photos can reveal what’s adding value to kitchens and other parts of local homes.
Home equity loans help some owners renovate effectively. Tapping into home equity to enhance the property’s value, or even to start a home-based business, can add a great deal of value (and satisfaction) to a home.
An owner who dedicates a specific section of the home solely to operating a regular business can earn a break for some home-related expenses (in addition to all of the mortgage interest) when tax time rolls around.
Tip 2: Pay the Loan Down (Should You?)
It’s common for homeowners to pay a little extra on their mortgage principal — monthly or as a lump sum at the year’s end. By itemizing deductions, you can write off your mortgage interest. Ask your tax expert to find out how paying your mortgage back faster (assuming your lender allows it) could impact your tax savings.
For most homeowners, paying the principal down faster can shave years (and many thousands of dollars in saved interest) off the life of a loan. Still, speeding up the mortgage payoff is not necessarily the best way to handle that extra sum of money, if you have it to spare.
Paying down just the normal amount leaves more money freely accessible to the homeowner. That can help with home improvements, repairs, or any other needs and goals. Keeping enough cash in reserve is essential for homeowners. It lessens the risk of an unplanned and overwhelming financial setback.
Pro tip: In some states, homeowners work with their attorneys to create Domestic Asset Protection Trusts. These are designed to protect homes or farms that the owners plan to hold through their lifetimes.
Tip 3: Keep Regular Home Maintenance on Track.
Speaking of improvements and repairs…
Regular home maintenance isn’t the most exciting of subjects. But it’s a major part of preserving home equity. Regular attention to the HVAC system, the roof, trees and pipes matters immensely to the value of any home.
Upkeep can impact not just one house, but the property values of an entire community. If an area has unattractive or neglected exteriors, homes sell for less. Gradually, property values decrease in these areas.
This makes routine maintenance a key element of equity protection. This is why homeowners’ associations have strict rules and maintenance schedules. In any home or condo, it’s important to keep systems and interior design updated and well maintained, too. Waiting until it’s time to sell can create costly repair needs, safety risks, or health hazards.
Pro tip: An additional way to protect the equity in your home is by taking advantage of any available homestead exemption. Most states offer some form of it, and it protects a portion of a home’s value if the homeowner is ever sued over nonpayment of debts.
Tip 4: If You’re Buying, Consider Vesting as Tenants by the Entirety (Where Allowed by State Law).
For life partners concerned about protecting their hard-earned home equity, some states offer the couple the opportunity to buy the home as tenants by the entirety. Vesting as a “TBE” means both individuals own the entire property. And as long as either one of the couple is still alive, TBE vesting bypasses probate and each individual has protection against the other’s creditors (unless the debts are taxes or jointly owed).
This way, if any creditor seeks a judgment lien on the home, as long as the debt is in only one of the co-owners’ names, that lien can’t be placed on the home. Even in the case of bankruptcy. In serious financial challenges, this advantage can save the home and its value for both co-owners.
☛ Learn more about how home buyers vest their homeownership interests.
The policy driving a tenancy by the entirety? If one spouse is sued, it wouldn’t be fair that the other spouse, whose actions didn’t bring about the legal action, loses a roof overhead.
Tip 5: Refinance During the Next Dip in Mortgage Rates.
Interest rates are high as 2022 draws to a close — around 7%. But they might go down in 2023. Indeed, the Mortgage Bankers Association predicts that mortgage rates will go down to 5.4% by this time next year.
That’s great news. If the prediction holds, there could be two paths to lowering your monthly mortgage charges and improving your debt-to-equity ratio:
- If you have an adjustable-rate mortgage, and rates take a downward turn in the future, speak with your mortgage pro. You might be able to lock in a fixed-rate home loan with an attractive interest level.
- If you have a fixed-rate loan, consider getting a lower rate if the interest rates do go down significantly.
Economists are forecasting a tough time in 2023. At least they envision a silver lining! And it could help many homeowners reposition themselves to bolster that all-important asset: home equity.
Lance Lambert for Fortune: The Fed Admits a Sharp Home Price Decline Is Possible (Oct. 7, 2022).
Deeds.com: Buying a House to Save Money? It’s a Tried and True Method (Jun. 22, 2020).
Mark J. Kohler for Entrepreneur: Six Ways to Protect Your Home in a Lawsuit (May 21, 2015).
Justin Pritchard for TheBalance.com: How to Build Equity in a Home – What Can You Use Equity For? (updated Jul. 31, 2022).
Discover.com: Home Ownership – How to Build and Grow Your Home’s Equity (undated).