Building up home equity is a long, expensive process. However, certain events or circumstances can derail your rising home equity and actually cause it to decline, even after an appraisal that gives you a good idea of your home's value. While some of these events are temporary and outside of your control, others are things you can manage and weigh against the alternatives.
A New Appraisal
The true value of your home equity is based on the value of your home. Even if an appraisal results in a value that you agree with, it's no guarantee that a new appraisal or assessment will result in a similar value. Appraisers and assessors consider many factors and use different formulas to calculate value. If you're using an older appraisal to determine your equity, it's likely that a new appraisal would reveal something different. While a new appraisal is just as likely to raise your home equity, it can also reduce it if the appraiser believes that your home is worth less than it was when it was last appraised.
Housing Market Drop
An overall drop in the housing market negatively affects home equity. Whether it's because of an economic crisis, an overabundance of supply or dwindling demand in your region, your home equity is subject to changes in the overall housing market. Even if the percentage of your house that you own rises, your equity can decline if home values fall by a greater percentage than the percentage of the principal that you pay off with each mortgage payment.
One reason to have an appraisal is to assess your home's value to borrow against it. Borrowing against your home equity with a loan or line of credit will cause your home equity to decline as soon as you borrow. This will mean taking a step away from owning your home outright until you've paid back the home equity loan and continued to pay your original mortgage. Refinancing may also reduce the rate at which you build up home equity if you extend the loan for a longer period of time.
Declining Property Value
Just as a drop in the housing market can reduce your home equity after an appraisal, so can changes to your home's specific property value. This will occur if your neighborhood becomes less desirable due to new, unwanted development or declining property values for nearby homes. Buyers will not be willing to offer as much if your home has obvious problems that need addressing right away. Damage to your home will also cause your equity to drop after an appraisal, unless and until you invest in improvements.
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