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hello! just found this community. thanks for all the great info!… 
7th-Mar-2008 02:51 am
hello! just found this community. thanks for all the great info!

here's a question -- does one's home equity just 'drop'? or do you need a re-appraisal in order for that to happen?

we put down 10% on our house last year, and I'm sitting here watching the news about house prices dropping 10 percent in some areas (not mine yet, i dont think) and wondering if one day we'll suddenly be sitting on something where we owe more than our mortgage.

we would like to refinance if rates drop, but if that means opening the door to an appraisal that comes in less than last year's appraisal, i would reconsider it.
7th-Mar-2008 08:24 am (UTC)
That's a good question. Your equity in your house is [the amount it's worth] - [the amount you owe].

Obviously, you know how much you owe, the only question is how much a house is worth. At any given moment, an appraisal could determine your house's worth, but usually not to a dollar amount. Most appraisals give a range.

So, if you owe $100k, and your house is appraised, it might be worth $120k - $158k. So, you'd have somewhere between $20k and $58k in equity. On the other hand, if you have it appraised in order to have it refinanced, the appraiser will come up with a specific number.

The answer to your question is that it is certainly possible to owe more on your mortgage than the appraised value of your home. Hopefully that won't happen, but it certainly has happened to some people in areas where values are dropping.

If you decide to pursue the refinancing process, and the appraisal comes in lower than a previous one, you could, of course, choose not to refinance, and you can keep that appraisal to yourself.

Another option is to call your favorite realtor and ask him or her to do a CMA (comparative market analysis) for you. Most realtors will do this for free, and it will give you a good idea about the value of your home without actually getting an appraiser involved.

You can even have two or three different realtors do CMAs for you. And feel free to quiz them on how they got their numbers. Determing the value of a home is a bit science and a bit art.

In general, we see values drop only if employment drops precipitously. In my market, I'm being told we've had 9% appreciation over the last year.
7th-Mar-2008 08:40 am (UTC)
these are great answers -- thank you, thank you!

as far as comparables in the area-- i read my appraisal from last year, and the "comparables" seem so not comparable. we have an historic home on the local register, and they were comparing other sales like 1970s ranches. Is it just square footage / nearby neighborhoods that matter in terms of comps?

7th-Mar-2008 09:54 am (UTC)
Weird. I can only speak for my area. Here, I would only ever compare a historic home with other historic homes within one mile of similar square footage.

However, if there just weren't any similar age homes nearby, I might choose another age. I'd rather compare your 100 year old home with wood floors to a ranch with wood floors than to an 80s era house on concrete slab, for example.
7th-Mar-2008 05:27 pm (UTC)
very interesting. thanks again...
7th-Mar-2008 07:13 pm (UTC)
To be fair to your appraiser, historic homes are often really difficult to appraise. We have two historic areas in my city, and they're very different in value and in tone. In one of them, a difference of two blocks could make $100k worth of difference in value. So, our appraisal was a tricky one two (and, frankly, I disagreed with the appraiser -- but it all worked out in the end).

The most important thing to know about an appraisal is that it's a living document. It's always based on "recent" comparable home sales. So, every six months or so, it would be based on different sales, and might be different.

Also, appraisers are under a lot of scrutiny right now. Our appraisers are being required to take additional college courses. Lenders have discovered that bad appraisals lead to foreclosures and houses whose loans are far larger than their value. So, if you had your house appraised right now, an appraiser might also look at the price you paid last year, and try to be fairly close to that in value, or give some really strong reason why the value changed significantly (like a large addition).

Don't fear the real estate market. Just remember that you, as a home owner, are in this for the long haul. The people who are getting beaten up (financially) are the ones that watched too many episodes of Flip This House and expected to make a large profit over night.

Also, if you have a little extra money left over at the end of the month, or after your income taxes, consider putting some of that towards your principle. Depending on the size of your loan, even $75 or $100 more a month could get you paid off in 20 years instead of 30 (and save you tens of thousands of dollars in interest).

The only caveat to that is that it's better to pay off credit card debt before house debt, because the house debt is tax deductible.
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