Question: How Do You Lose Equity in a House?
A reader asks: My neighbors say they have lost equity and now must do a short sale if they want to sell. They say a short sale will bring down prices in the neighborhood. I don't understand. I have a lot of equity in my home because I have almost paid off my mortgage. I have not refinanced. How do you lose equity in a house?"
Answer: It's not like you can go up in the attic or down into the basement to find the equity you have lost. But you can lose equity in a house and later regain it. Although, in certain markets it often takes a long time for equity to make a rebound once it is lost.
You can lose equity in a home through no fault of your own. You can also lose equity in a house because you did something perhaps considered a bit risky.
Ways to Lose Equity in a House
People sometimes see the world through rose colored glasses. Everything is wonderful, and they believe it will always be wonderful. But bad stuff happens, sometimes when you least expect it. What might seem like a harmless thing could turn out awful.
Here are ways you can lose equity in a house without meaning to do it:
- Changing the structure or layout of your home. Not every home improvement project is well planned or wisely orchestrated. If you reduce the number of bedrooms, paint all of your walls black or convert a garage into a room addition, you might lose equity in your house.
- Refinance a home loan by taking out cash. If you get cash back on a refinance, you have increased the amount of your loan. If appreciation does not keep pace or values fall, you could owe more than your home is worth, which would mean you have lost equity.
- Borrowing on a home equity loan . When you take out a home equity loan, you are losing your equity to financing. Your equity shrinks while your financed loans get bigger. Of course, if you use the equity loan to remodel a kitchen, for example, you might replace the equity you lost.
- Deferred maintenance will cause you to lose equity. Everything inside your home has a shelf life, including the home's exterior siding. You may need to replace the roof or windows. Appliances such as HVAC eventually wear out. If you let things deteriorate and never fix or repair anything, your equity will suffer.
- Financial markets can collapse. It happened before, and it can happen again. We are not immune. In 2007 we survived the mortgage meltdown. However, big banks followed in 2008 and demanded federal bailouts. Homes went into foreclosure. Short sales became a household word. Short sales and foreclosures affect values of neighboring homes.
- Demographics of your neighborhood can change. If criminals and thugs take over your neighborhood, for example, that can change neighborhood dynamics, alter pride of ownership and drop prices. If house prices fall, your equity goes out the window.
- Somebody could die in the house. This is not something you might think about very often but buyers do. It's a big deal for many buyers if there's been a death in the house. It's even worse if the home is stigmatized due to a tragedy. You can lose equity over it.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.
