What’s Your Santa Barbara Home Worth?

Home value has a slightly different meaning if you ask a homeowner, appraiser or tax assessor. But in most cases, home value means the amount for which a house would likely sell, otherwise known as the current market value. Mortgage lenders, as well as buyers and sellers, typically rely on professionals to calculate market value.

Home equity is the value of your home minus the balance of your mortgage. To put it another way, home equity represents the portion of the house you’ve “paid off” and therefore own. Equity increases slowly with each mortgage payment, but may grow faster if you make value-boosting home improvements or if home values rise in your area.

As a homeowner, equity is a valuable asset that directly affects your financial freedom. More equity means more ways to achieve financial goals. You can make home improvements, consolidate debt, cover emergency expenses or even pay college tuition by tapping home equity.

Don’t cash out or borrow against home equity just because you have it, though. Tapping equity can add years to your mortgage payoff and means less cushion if the home loses value. And if you have trouble paying the loan for any reason, such as losing your job, the lender could foreclose on your house.

For home buyers and home sellers, knowing current market value helps you make smart decisions about how much to offer on a house you want, or how to price a home you’re selling.

As a homeowner, value is also directly related to your home equity. Equity is calculated by subtracting the mortgage balance from the home’s current market value. You build equity as you make monthly payments and pay down your principal, but other factors, most notably home price appreciation, can speed up or slow down the equity-building process.

With enough equity, you may be able to refinance into a loan at a lower interest rate or drop your private mortgage insurance. You might even be able to remodel your bathroom or pay off credit card debt through a cash-out refinance, home equity loan or home equity line of credit.

These are important financial decisions that should be made only after obtaining an accurate estimate of your home’s value.

Refinancing replaces your existing mortgage with a new loan. Some reasons for refinancing are directly related to home value, while others aren’t. Refinancing might be a good idea if you want to:

• Lower your interest rate: If mortgage interest rates drop after purchasing your home, refinancing could allow you to lock in a lower rate, reducing your monthly payment.
• Change your loan term: Refinancing into a shorter-term loan, for example 15 years instead of 30, may increase your monthly payment, but it will also reduce payback time so you pay less in interest and own your house sooner.
• Drop mortgage insurance: Refinancing can remove mortgage insurance in two ways. First, you can refinance from an FHA loan (these loans always carry mortgage insurance) to a conventional loan without paying PMI if you have built up over 20% equity on your existing loan. Second, you can refinance from a conventional loan with PMI to another without it if your current home value and mortgage balance puts you over the 20% equity mark.
• Pull cash out of your home: As you pay down the loan and your home gains value, equity increases. When your equity stake is large enough, you may be able to turn some of it into cash through a cash-out refinance.

Unlike other assets, such as your car, a home often appreciates over time. In general, real estate appreciates because there’s only so much space for new development. As time goes on, there’s generally more demand for less land, driving up value. If demand drops, however, prices could go down. Other factors that can influence changes in home value are:

• How much the house sold for in the past
• Quality of the neighborhood
• Market conditions, such as the number of homes available and strength of the economy
• Tax assessment
• Nearby amenities
• Square footage