When your home’s value rises, you have more equity, which is a good thing. When it sinks, you have less equity—and it might be an indication that the housing market and the economy in general is headed for choppy waters, which is a bad thing. Both of those scenarios assume that home values will change steadily over time—but what happens if your home’s value drops or rises sharply and suddenly?
Right now property values are pretty high, and have been rising steadily for years. But as anyone who was alive in 2008 can tell you, home prices can plummet overnight. If your home’s value goes up or down very rapidly, there are a few steps you should take to protect your investment and your property.
What to do if your property value goes up sharply
If you wake up one morning and find that your house has jumped in value, you automatically have a huge benefit: more equity. You literally own more of your house than you did a short time ago, just because the ratio between what you owe on your mortgage and what you could get if you sold the place has gotten bigger.
But don’t just take the win—there’s more you can do to really take advantage of the situation:
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Have the house appraised. When you took out your loan to buy the house, everything was based on the appraised value of the place. If the house is now worth dramatically more, you have an opportunity to get rid of private mortgage insurance (PMI) if you have it, or refinance to a better rate (if rates are, in fact, lower than when you initially took out the loan). To do either of those things, you’ll need to have the place appraised to make the increase in value official—not a self-appraisal, but paying for a real appraisal. That relatively small cost might be well worth it if you save yourself thousands (or more) in PMI and interest.
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Consider selling. A house isn’t just an investment, it’s where you live—but people sell their homes every eight years or so, on average, so if your home is suddenly worth a lot more, it’s worth asking yourself if the time is right. Selling your house can give you a nice payout by liquidating all that equity, after all.
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Consider a HELOC. A home equity line of credit (HELOC) is a loan made against your home’s equity, so waking up with more of that equity means you can get a larger HELOC to work with. You can use that HELOC money to make improvements to the house at a relatively low cost in terms of interest, which can lead to even higher home value and even more equity, so this could be a golden opportunity to renovate, repair, and refresh your property.
What to do if your property value goes down sharply
The opposite scenario is waking up one day to discover your home is worth considerably less than it was yesterday. This is not the time to panic, however—it’s the time to consider some thoughtful moves that can protect your finances and your home:
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Appeal your property tax assessment. Your local government assesses the value of your home in order to set the amount of tax you have to pay on the property. If your property was last assessed at the high tide of its value, it might be worth it to file an appeal to get your assessment, and thus your tax bill, lowered. The procedure will vary depending on where you live, but it could mean significant savings.
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Contact your insurance. Another reason to get a fresh appraisal on your home is your homeowners insurance, which is based in part on your home’s value and the estimated rebuilding costs. If that value has dropped, you might be able to lower the amount of coverage, and thus the premiums that you’re paying for that coverage.
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Prepare for HELOC changes. If you already have a home equity line of credit on your house, it was based on your home’s old valuation. If your lender notices that your house is now worth significantly less, they might freeze or reduce your HELOC. You still have to repay anything you’ve borrowed from the HELOC, but you might lose access to any remaining funds. It might make sense to move some money out of your HELOC if you know you’re going to need it soon.
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Consider refinancing. If the shift in your home’s value has pushed you into negative equity territory (meaning you owe more on your mortgage than the house is currently worth), you can consider a refinance to balance things out. This can be tricky depending on current interest rates and your lender’s willingness to work something out, but it’s something worth considering the moment you notice the sudden change in your home’s value—and it’s certainly worth a call to your lender to see what makes sense.
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