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Your equity may be growing faster than you think

Did you get your share of the estimated $1.2 trillion in equity growth that American homeowners reaped in the past 12 months? Do you have at least a rough idea of how much equity you’ve got? Is it a big deal to you financially?

Questions like these are especially relevant in the wake of the Federal Reserve’s frothy new home equity estimates, which put total equity holdings nationwide at $12.5 trillion — a stunning doubling between 2011 and the final quarter of 2015.

$12.5 trillion Total home equity holdings nationwide according to the Federal Reserve

Equity is the difference between your mortgage balance and the market value of your property. If your house or condo is worth $350,000 and you’ve got $200,000 in mortgage debt against it, you’ve got positive equity of $150,000. If the house is worth $350,000 and you’ve got $400,000 worth of mortgages on it, you’re underwater by $50,000.

Though the vast majority of the country’s houses with mortgages have positive equity, roughly 4.3 million homes are underwater, mainly as a legacy of the financial crisis and recession. Another 9.5 million are what analysts call “under-equitied,” with less than 20 percent equity, according to data from research firm CoreLogic.

When you have minimal or no equity, your financial options tend to become limited: You may find it impossible to sell your house without having to bring lots of cash to the closing. You may also find it difficult to refinance out of an albatross mortgage that’s been around your neck for years. And you likely can’t tap into your home for help on worthy expenses — you can’t take out a second mortgage or home equity line of credit to help with tuition payments or remodeling the kitchen.

When you have minimal or no equity, your financial options tend to become limited: You may find it impossible to sell your house without having to bring lots of cash to the closing.

Kenneth Harney

But the most significant news emerging from the latest national data on equity is that things are looking up. Thanks to rising home prices and pay-downs of mortgage principal, large numbers of people previously in negative equity are crossing the line into positive territory. CoreLogic estimates that around one million of them did so during 2015. Another half million owners escaped from under-equitied status, moving them above 20 percent equity.

If prices rise another 5 percent in the coming year, 850,000 more homes should see significantly broadened financial options, say researchers.

That’s great but what does it mean for you? Start with your knowledge of where you are equity-wise. Equity is inherently challenging to track; nobody sends you a monthly accounting. You can’t just go look it up somewhere.

Recent research from mortgage lender loanDepot, LLC suggests that most of us don’t have a good grasp on our home’s market worth, making equity estimates difficult at best. Researchers found that though 57 percent of owners believe their home value has increased since 2012, 80 percent of them underestimate how much it’s actually risen. That’s at odds with findings by Quicken Loans’ monthly analysis of owners’ estimates compared with appraisers’ reports. In the latest study, Quicken found that owners overestimate their home values by around 2 percent.

Many of us can only guess about the size of what may be our largest, investment asset. LoanDepot Chief Financial Officer Bryan Sullivan says this is especially the case for people who purchased during the housing boom, watched home prices crater, and since then haven’t kept up with local market changes.

Kenneth Harney

Either way, many of us can only guess about the size of what may be our largest, investment asset. LoanDepot Chief Financial Officer Bryan Sullivan says this is especially the case for people who purchased during the housing boom, watched home prices crater, and since then haven’t kept up with local market changes. They have regain equity “many thought was lost forever,” but also “are unclear about how to determine changes in their equity.”

That, in turn, may be stopping them from making good use of their equity positions — whether to sell and move or to pull some of it out via a home equity credit line or second mortgage.

So how to keep track? Start with the part of the equation you probably know precisely because it’s sent to you monthly by your lender: your outstanding principal balance. To get an idea of your market value you can type in your address at sites like Zillow and Redfin and others that offer automated estimates online. But beware: Local area median error rates on these sites can mangle your calculations.

If you are considering selling your home in the forseeable future, you can contact several local realty agents who specialize in your area, level with them about your timing, and ask for their best estimates. Or you can hire a local real estate appraiser. It’ll cost you some money, but if you seriously want a benchmark on your equity, either of these two options would be the way to go.

Kenneth Harney is executive director of the National Real Estate Development Center.

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