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We have all heard the term "upside down mortgage" also known as negative equity. Simply put, this is when a homeowner owes more on the home than what the home appraises for. Those who often fall prey to this type of situation are those that buy homes with little or no down payment and finance for long terms of 30 plus years. Additionally, those hit hardest in this situation would be the home owner that bought the biggest house on the block in addition to the above mentioned pitfalls. The largest home on the block has the least potential for value increase because it's appraised value is more subject to what the market will bear. The reason is the comparison homes in the area have undoubtedly less value and their lower value pulls down the amount the large home can be appraised at or appreciate. Appraisers look at the other homes in the area and use their collective values to appraise your home. If most of the homes in the immediate area are smaller, your home will have a real limit as to how fast it can accrue value.
Many new home owners and first time home owners are easily beguiled into buying the big house, not realizing the long term pitfalls. Had they aimed for the moderate sized home, with potential to increase the square footage, they would have seen a more dramatic increase in the appraised value. It is a scary thing to contemplate the idea that the home you love could be worth less than what is owed which is a symptom of a bad housing market.
There are a few things you can do to help your home retain equity and even gain equity. If you were one of the first time home buyers that took advantage of the so called 8000 dollar home buying credit only to realize that such a small down payment would have very little impact on your homes equity, these tips are for you. Another group of interest would be those that went with FHA loans with little or not down payment required only to realize later that the small down payment also may have backfired, especially if your home lost value of the past few years. Use these strategies to fight the down housing market and protect your investment.
1. Shorten your mortgage term-
Reducing the number of years your home is financed for will save you thousands in interest alone and will help build equity up faster.
2. Refinance at a lower rate-
If you haven't taken advantage of lower rates then you have had your head in the sand. Do so now. Paying less interest means more of your payment goes towards your principle and when you do this your equity builds faster. Make sure you do your comparison shopping with regards to refinancing, pay attention to the closing costs.
3. Refinance with the bi monthly payment option-
Not only will this also save you thousands over the life of your loan, you actually shave off several years of your mortgage while doing it.
4. FHA Streamline-
Most homes financed through the Federal Housing Authority can be refinanced without having to be appraised if you are simply trying to lower your interest rate. However, your home will still need to be appraised if you are considering shortening your mortgage term.
5. Make extra payments-
Every little bit helps. If you can make either extra mortgage payments, or can round up your payments monthly say from $1200.00 to $1300.00 you are actually making one extra payment every year. It may seem like a small amount but it does add up over the course of a 30 year mortgage.
6. Add square footage-
If you have the ability to increase the square footage in your home, you have the ability to add value which will fight a sagging housing market. Consider the benefits of changing an enclosed porch into a sun room or a family room. There are sites that will help you determine exactly how much value the additional square footage will add to your homes value. Increased value equals increased equity. Caution- In most states, these rooms must have certain criteria met before they are considered livable square footage. Most states require that the room have heat and air conditioning, electrical outlets and windows. Research before you build or add on.
7. Update your home-
If you can updating with energy efficient appliances, and windows among other things can really boost the homes bottom line. Whether you plan on selling your home or not, these things are just plain smart improvements to your biggest investment. The money you may save yearly in updating to cost efficient appliances like your refrigerator and water heater can help pay down that mortgage if you do your homework and add the savings to your mortgage payment.
Rome was not built in a day, and updates can be costly, however, by prioritizing that which is most urgent over cosmetic updates will help keep you going in the right direction and if you have to, do a little here and there, the important thing is to get started.