Who Represents You?

The value of the house determines your buying power, tax bill, insurance premium and other financial planning aspects of your life. Let us look at each of them separately.

1. Real estate investing: When a homeowner wants to sell the house, it is not just that he wants to walk away with the most money and win the "I sold my house for more than you" award. It is mainly so he or she can move up to another property with as small an increase in monthly payment as possible. If you were scaling back, it would be wonderful if the price of your house, and the profit made from it, would actually pay for a home outright.

If the seller is moving up, he or she obviously wants as much from the transaction as possible to help with the down payment, closing costs and possibly even various debt reduction of other liabilities -- auto loans, school expenses, consumer debt, etc. In addition, if you want to start investing real estate, a line of credit from your equity could be an option.

2. Your tax bill: The value of the house will also affect how much a homeowner will pay in taxes over the next year. This tax assessment process, however, is different jurisdiction to jurisdiction. For the Washington, D.C. area, it is assessed nearly every year (Fauquier, Culpeper and Rappahannock counties, every 4 years). However, some jurisdictions across the country are not assessed for years; therefore, the tax bill is stable for that period.

In today's leveling home prices, the value of a house at time of re-assessment  will save homeowners money each month on their mortgage payment since it means a lower tax bill, and thus, a lower monthly escrow payment.

3. Insurance purposes: If your house burns down, Lord forbid, you will need to know the value of your house for rebuilding purposes. This number is more than likely going to be different from the "market" value of a house. The cost to rebuild your house will usually be lower than the amount a homeowner could clear from the sale of the house. Nevertheless, it is a good idea to periodically call your insurance company to make sure you are insured enough to rebuild or repair your house in case of damage or destruction.
4. Cash-out refinancing: Many refinancing programs allow homeowners to use equity from the house for cash. You may want to remodel or finish the basement, build an add-on to the structure, consolidate debt, send a kid to college or even retire, but that money coming back to you at settlement will depend, first, on the value of your house. Then, it will depend on your income and ability to repay the lender for the cash-out from the mortgage. Some people have a lot of equity in their house. However, they will never be able to gain access to it until they sell the home; because to borrow the equity in a mortgage is prohibitive since they do not have the income to qualify for a higher payment.

For those who are nearing retirement, they could consider a reverse mortgage where the lender pays them in monthly payments for the equity (ergo, reverse mortgage); and then the mortgage is paid off once the house is sold, just like a traditional mortgage. Thus, the value of the house will help determine the annuity payout for the homeowner.

Finally, the equity in your house can be used to help determine your net worth. Your assets minus your liabilities determine your net worth. With that in mind, it is important to remember that every time you pull cash from your equity, you are depleting your net worth.

By M. Anthony Carr               2007 Realty Times. All Rights Reserved.

Modified By Donald J. Khoury