Homeowners can’t help but do a little dance every time property values increase. What’s not to love? Higher values create more equity for homeowners. Sellers can pocket even more cash. And investors enjoy a nice boost to their net worth.
Among all these positives, one may wonder if there are any downsides to rising home values. While the financial benefits largely outshine any drawbacks, there are things homeowners need to consider.
The following article sheds light on areas homeowners might overlook as property values increase – including some things that could impact their finances in the short term.
Homeowner’s Insurance
Fluctuations in your home’s value are commonplace. Sudden jumps or dips likely do not warrant a change in your homeowner’s insurance policy. However, reviewing your coverage is wise if prices have steadily risen for two or more years.
Some insurance companies will automatically adjust your policy annually. If you’re unsure about your coverage, contact your insurer to review your policy. Increasing your coverage might cost a bit more, but knowing your home’s fully protected is paramount.
NOTE: Homeowner’s insurance bills are usually escrowed, and the amount due is evenly applied to your monthly mortgage payments. Consequently, if your homeowner’s insurance changes, your mortgage payments will reflect the price difference.
Property Taxes
Property taxes are handled differently depending on where you live. Most cities and counties reassess property values annually. If your home’s value increases, you could encounter a larger tax bill in the coming year. Fortunately, many places restrict how much property taxes can increase per year.
Like homeowner’s insurance, property taxes are usually put into escrow. That means any increase in property taxes should show up in your monthly mortgage payments.
Home Equity
A major perk of being a homeowner is building equity in your property. As home values climb, that equity likewise increases – providing homeowners with additional funds for projects like home upgrades or consolidating high-interest debt.
Home Equity = Home’s Appraisal Value – Amount Owed
While homeowners gladly welcome the increase in equity, there are things to consider before tapping into your home’s equity. For example, if the property value increase is temporary, you could end up borrowing a larger percentage of your equity than anticipated. Most lenders will only allow you to borrow a portion of your available equity to prevent this scenario, but you should always be mindful not to drain too much from your home’s equity pool.
Closing Costs
Many homeowners will use rising property values as an opportunity to sell their house and pocket a more considerable sum of money. It’s an excellent strategy for retirees looking to downsize their homes.
The challenge can arise when a homeowner wants to sell their house and upgrade to a larger one. First, they will encounter higher seller closing costs. Then, they will pay more toward buyer closing costs on their new home.
Before purchasing a home in a rising value environment, determine if the gains from selling your current home will help offset the new property’s higher closing costs and sale price.
Refinancing
If you’re a homeowner interested in refinancing your mortgage with your existing lender, higher property values shouldn’t impact your loan. However, if you plan to switch your loan to a different lender, you could face some higher costs.
For example, prepaid items like property taxes or homeowner’s insurance could increase if the value is reassessed during the closing process. Always ask your lender about the impact of rising home values before starting the refinance process.
Maintenance
Anytime your home’s value increases, you should work to retain that value. That includes maintaining your property and completing any necessary repairs. Should you decide to take advantage of the higher property values and sell, a well-maintained home could command an even higher asking price.
Net Worth
A jump in your home’s value will also increase your net worth - on paper. Too often, people become fixated on this number – which could lead to retirement mistakes. The real estate market constantly fluctuates, meaning your home’s value might change in the coming years.
While an increase in value and equity is nice, that money isn’t realized until you sell the property. You can use the value as a benchmark; however, you should always speak with your financial advisor before changing your retirement or savings plans.
We’re Here to Help!
Rising home values are a boon for homeowners. The benefits are many, and the drawbacks are limited. However, it’s important to understand the potential downsides, such as possible increases to your monthly mortgage payments.
If you have questions about rising home values or how to access your home’s equity, we’re here to help. Please give us a call to speak with a team member today.