Lisa Oleksak-Sullivan's Blog
The equity in your home plays a major role in how much profit you'll make off the sale, but it's not always simple to determine just how much of the home you own (even if you haven't refinanced). Here are a few tips to understand equity and how you can use it to your advantage.
What Is Home Equity?
The simplest definition is that home equity is the difference between the market value and your current loan amount. When calculating, you should also take into account related financing (e.g., home improvement loans, second mortgages, etc.). If you owe more on the home than you owe, you have negative home equity.
Of course, the number you generate is just an estimate. Just because your market value is listed at a certain price, doesn't mean that a buyer will offer that amount. Overall though, it's a good place to start. Once you have a baseline, it can give you a better idea of how your home sale will go and what you can afford once you move out.
The Bottom Line
Let's say you bought a home for $150,000 and you've paid off $50,000 total. If your home was recently assessed at $400,000, then your home equity is now $300,000, even though you only owe $100,000. The longer you've owned your home, the more you'll pay toward equity as opposed to interest.
But home sale profits aren't the same as home equity. You also have to deduct any expenses associated with selling the home, including staging, listing and real estate agent fees. This can take as much as 10% off the total sale price. Some lenders will charge a penalty fee for paying off the loan early, so you'll need to check your contract to understand your responsibilities.
Equity and the Home Sale
Experts recommend having at least 10% equity in a home if they're making a lateral move. So if you need to relocate for your job and you're planning to move into a similar home, then you'll need less than someone who's upgrading their lifestyle. If you want a bigger and more luxurious home, it helps to have at least 15% — and preferably more. The less equity you have, the more likely you'll end up with negative equity.
Equity can be confusing because you ultimately own the home while you're paying the mortgage payments. Your lender is simply using the value of the property as a type of collateral in case of default. You can think of equity as a form of leverage you can use to give you a little more confidence during the sale.
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Before you even set out to buy a home, you may think that you need to look at a magic number of homes in order to find the house that’s right for you. There’s always a fear among buyers that they didn’t look at enough homes before settling on one. The number of homes that you look at is up to you. There is no magic number that will dictate finding the perfect home. The most important thing is to trust your own intuition. In A seller’s market, you also may not have much choice. When inventory is low, if you find a home you love, you’ll need to move to make an offer on it!
The Average Buyer
People looking at condos take between 1 and 3 months to find the property that’s right for them. Those looking for single family homes tend to take a bit longer- between 3 and 6 months to find a home. Buying a traditional house seems to spark more questions and more uncertainty, which leads buyers to take their time to find what they’re looking for.
Know Where You Want To Live
Before you start your home search, you should have a good idea of where you want to live. Have a list of cities, towns, and neighborhoods narrowed down to make your search a bit easier from the start. Take a ride around potential neighborhoods and get a feel for them. See the stores, restaurants, and nearby parks to really understand the area.
Match Your Lifestyles
Where you choose to live has a lot to do with your lifestyle. Think of the following:
- Where your friends live
- Where your family lives
- Where you work
- What you do for fun
Whatever you love and whatever you love to do should be a factor in your home search. If you love the beach, you don’t want to be a three hour drive away if you can help it. You also don’t want a 2-hour commute to work. Find the balance to make your life happier in the new space you choose.
Make A List
It sounds simple, but making a list of what you must have, what you’d like, and what would be a bonus can really help you in your home search. This holds true whether you look at 2 homes or 50 homes. The number of homes that you look at isn’t as important as your needs and wants. Buying a home is a huge investment and you need to be happy with your decision. While it’s not completely advisable to buy the first house that you see, if you have a good idea of what you want in a tough market, it’s best to put an offer in.
If you're renting a nice house, condo, or apartment, there's a good chance your monthly rent check is almost as much as a mortgage payment. Perhaps you've realized this and have been asking yourself why you're contributing to someone else's nest egg, instead of your own! If that sounds familiar, you may be ready to take the plunge into home ownership.
The other half of the equation is whether you're financially ready, and that would depend on a variety of things, including your credit rating, your debt-to-income ratio, and your ability to make a sufficient down payment on a new home. Although a 20% down payment is a desirable target to aim for, there's often a lot of flexibility on how much you're required to put down on a house.
One of the main reasons a 20% down payment is desirable is that it takes you "off the hook" for having to pay monthly private mortgage insurance (PMI). The second advantage of making a substantial down payment is that it reduces the principal amount of your loan, which, in turn, lowers your monthly payments even more. However, if you're ready to become a home owner, but can't afford a 20% down payment, you can often eliminate PMI payments earlier than scheduled by making extra principal payments. The bank or mortgage company you decide to work with can fully explain their policies and what your options are.
If you are interested in making the transition from renter to home owner, now's a good time to start talking to loan officers. If nothing else, you'll be educating yourself on the intricacies of buying a home. Working with an experienced real estate agent is another way to learn the ropes, so to speak, when it comes to the home buying process.
Other than the financial benefits of building equity in your own home, there are also a lot of practical advantages. If you're currently a renter, for example -- especially in an apartment building, duplex, or townhouse -- you're probably tired of the lack of privacy and the unwelcome noises you can often hear through walls, floors, and ceilings.
Becoming a home owner brings with it a pride of ownership and the ability to plant trees, bushes, and gardens on your own property. Depending on what's available in your price range, you can also enjoy your own private deck, screened in porch, or patio. Options for the kids (if you have them) include swing sets, sand boxes, and room to play backyard sports or run through a water sprinkler during the hot weather.
If you feel like you are ready to take the plunge into home ownership, the first step is to make lists of your requirements, your preferences ("wish list"), and financial resources. The next step is to find a good real estate agent to start showing you homes that fulfill your needs and check off as many items on your wish list as possible!