Your home's value plays a key role in the amount of equity you have. If your home's value drops, your equity -- the amount of your home you actually own -- will also drop. This becomes important when you're selling a home or seeking to refinance your existing mortgage loan. To determine your home's value -- and, by extension, the amount of equity you have in it -- your lender will rely on a real estate appraiser.
Why Equity Matters
Your equity is the difference between what you owe on your mortgage loan and the value of your home. If you owe $100,000 on your mortgage loan and your home is worth $180,000, you have $80,000 equity in your home. Your equity matters when you want to refinance your existing mortgage to one with a lower interest rate. Most lenders require that you have at least 20 percent equity in your home to qualify for a refinance, something that might prove challenging if your home's value has dropped. Equity matters, too, when you're selling your home. You'll have to pay your real estate agent's commission -- usually 6 percent of your home's sale -- and other costs when selling. If your home's value has fallen and your equity has dropped, you might see your profits from a sale take a similar tumble.
Your home's value will fluctuate. To determine your current value, your lender will send a real estate appraiser to your property. This professional will look at your home's inside and outside to determine how much it is worth. This is not a free service; though costs vary by appraiser and location, you can expect to pay from $400 to $500 for the services of an appraiser, a cost your lender will pass on to you.
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To determine your home's value, an appraiser will study recent sales of similar homes in your vicinity. If you are selling or trying to refinance the mortgage on a two-story Victorian home, your appraiser will study the sales prices that other Victorians in your neighborhood have fetched. These prices will serve as a starting point for your appraiser. Not all nearby home sales will matter. Your appraiser won't consider the sale of a Victorian two doors away if you're trying to sell a 1970s ranch home. The two home types aren't similar enough.
Your appraiser will consider several other factors in determining your home's value. If you've made significant improvements to your home -- such as renovating the kitchen or adding a master bathroom -- that will boost your home's value. Your home's value can also rise or fall depending on its age or size. If your appraiser notices serious problems -- such as a sinking foundation or leaking roof -- your home's value can fall.
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