The Nest Egg of Equity: Homebuyers who cut back on what they can afford can pay off solidly later
For most Americans, the biggest investment they make in their life is buying what they refer to as their home.
With a few historical exceptions, the value of a standard home only increases over time. For this reason, longtime real estate agent Rob Higgins always coaches home buyers to buy as much home as they can afford so that they can ultimately benefit from its value or equity.
“Even if you have to work on it, a home pays off in the long run,” said Higgins, executive vice president of the Spokane Association of Realtors. “Access as much as you can. Live like a poor man if you can. In 10 years, you’ll turn around and say, “Man, I’m glad I did that.” ”
While it sounds obvious, paying the mortgage on time starts the process of stock growth, said Greg Deckard, chairman and CEO of State Bank Northwest.
Otherwise, there are a number of steps homeowners can take to build equity faster. You just pay a little more each month, like rounding your mortgage payment up to a few hundred dollars, he said. Every little bit pays off faster, which reduces the amount of interest paid over the life of the mortgage.
“One of the proven ways is to refinance your home as low as possible,” Deckard said. “If you make two half payments a month, the mortgage will go down faster.”
The other simple advice Deckard had was to make sure the house was kept in good shape.
“Of course, keep it in good condition and show a pride in the property,” he said.
Michelle Mendez, operations manager for the Lee Arnold team, which specializes in selling fixer tops, agreed. She said the main value of the house is tied to the big ticket items, especially when it comes to sales.
“Make sure that the roof and (heating, ventilation and air conditioning) are good and that there are no problems with the installation,” Mendez said. “Those are the things I would really worry about because paint and carpet on the street are very easy to fix.”
Bryan Crabbe of Five Star Real Estate Group said some salespeople clean the carpet, splash fresh paint on the walls, and call it good.
“That’s all well and good,” he said. “The best projects I’ve seen are the people who try a little harder. They fix everything to the nth degree … so the next buyer doesn’t have to fix anything. “
The difference in selling price could be anything from a below list offer to a bidding war, he said.
“Everyone knows kitchens and bathrooms are really what a home sells,” Crabbe said. “Make sure they are in good condition. Comfort is also a very big part. Make sure the yard is presentable so the next buyer can come along and see the value of what they are buying. “
Homeowners looking for major upgrades to an existing home will struggle to find available contractors who have stretched thin during the current housing boom, he said.
“Everyone has a budget. Your budget is generally not growing as fast as the real estate market is now, ”he said. “Income does not increase by 10% or more per year. But housing tops that due to the lack of inventory. “
Mendez said one of the benefits of buying an older home is that it gives homeowners the opportunity to redesign it in their image.
“You can make this house the house you dreamed of instead of moving into someone else’s dream,” she said. “Yes, new building is fantastic. But I think the older houses have better bones. “
Joel White, executive director of the Spokane Home Builders Association, agreed with Mendez that communities like Spokane with lots of older, existing homes have tremendous untapped potential.
“I see this as a great future for Spokane, which has an aging housing stock,” he said. “When real estate prices rise, you will see investors and individuals upgrading their homes. Certain pockets will struggle. But when the owners take pride in their neighborhood and start rebuilding it will be really positive.
White saw this change in downtown Vancouver, Washington when he lived there. Tired of living in Portland, people started investing in and remodeling older Vancouver homes.
“You get momentum in your neighborhood when a lot of people are doing it,” he said. In Vancouver, “it was a dynamic improvement in a suppressed area.”
With home values in Spokane increasing in double digits, existing homeowners have seen an increase in home values. David Flood, the STCU’s chief loan officer, warned homeowners not to try to capitalize on the boom.
“Just because you have equity I wouldn’t say use it,” Flood said. “The prices are falling. I would say be smart. “
State Bank Northwest’s Deckard agreed.
“Take good care of yourself. Don’t use the equity in your home to pay for personal expenses like vacation, ”he said. “Don’t put a car or other personal expenses on it. It’s a lien on your house. That will reduce your equity. “
The only way for someone to capitalize on the value they have built in their home is to sell it or borrow it against them.
For homeowners selling, “You still have to buy something in this hot market,” Deckard said.
Still, Higgins, a former Spokane City Council member, said record residential real estate prices brought prosperity to homeowners who were willing and able to survive those early days of scrounging to pay the mortgage.
“It’s not the best financial investment. You can better invest in other things, ”said Higgins. “But you’re going to need a place to live. So, get the house, even if it’s a fixer-upper. For most of Central America, that’s their nest egg. “