Understand What Home Equity Is
One of the most important considerations in selling your home is determining how much equity you have in it. You begin to build equity in your home when you make the initial down payment when you buy it. Each monthly payment includes a payment of interest and a smaller amount is applied to pay the loan principal. Only the amount you pay toward the principal goes toward your home equity.
Over years of making payments, your principal balance gets reduced and you slowly build more equity. At the same time, your home’s market value may go up. Your home equity is the market value of your home minus any loans, liens, or other obligations against it.
Determine How Much Equity You Have
You can approximate the amount of equity you have by estimating your home’s value using an internet search on Zillow or similar site that tells you the sales prices for comparable homes sales in your neighborhood. That will give you a sense of what your home is worth.
Next, figure out what you owe on the home. Use your most recent mortgage statement to determine the mortgage balance remaining. If you have a line of credit or a second mortgage on the home, use the most recent statement to determine the remaining balance. For a more accurate amount, ask your lender for a payoff balance. Then add all outstanding debt together for your total debt. Subtract the debt total from the home’s value. The remaining amount is your approximate home equity amount.
For example, assume your home is worth $350,000 based on your internet research. Assume that the first mortgage balance is $200,000, and you have a second mortgage balance of $50,000. You would have $100,000 in positive equity ($350,000 value – $200,000 mortgage – $50,000 second mortgage = $100,000 home equity).
If your home sells for $350,000, you would incur transaction costs (often about 6-10% of the sales price, which includes the real estate agent’s commission, property taxes, attorney’s fees, and so forth) that would be deducted from your $100,000 in equity. Whatever is left over after those costs are paid is yours to apply toward the purchase of a new home, moving expenses, or anything else you wish to do with the proceeds.
On the other hand, if your home value is not enough to pay off the mortgage balance owed on it, you will not be able to sell the home unless you are prepared to pay the balance out of your savings. This is called a negative equity situation.
For example, if your home is worth $350,000 but your mortgage balance is $375,000, your home equity is -$25,000. If you sold your home for $350,000, you would have to pay your lender $25,000 out of your pocket, plus associated closing costs. Before you sell, you will have to discuss this with your mortgage lender to see if they are willing to allow you to sell the home and forgive any balance due on the mortgage. In most cases, you will have to wait to sell until your property appreciates and your principal balance is lower.
How Much Equity You Need to Sell Your Home
If you can sell your home and have enough money from the sale to pay off the mortgage(s), home equity lines of credit, outstanding taxes, and related transaction costs, you will not have to pay anything out of your savings to sell your home. For many people, they can afford to sell their home only if the sale proceeds will cover all outstanding debt and closing costs.
For most people, the more equity you have, the better. How much equity you really need depends on a variety of factors. One factor is the reason why you are selling. If you are selling because you have to relocate, you may need only 10% of your home’s market value. If you simply desire to move up in size or change neighborhoods, you probably need at least 15%.
What to Do with the Proceeds
Most people need what they recover from the sale to apply to a down payment on a new home. If you do not need it for a down payment, you may want to consult with a financial planner about the best way to use it. You may want to deposit it into a retirement account or create a home equity line of credit, or use it to fund other investments.
Consult with a Real Estate Professional at Katie Zarpas Group
If you are thinking about selling your home, contact the real estate expert at Katie Zarpas Group for more information. Katie Zarpas can give you a more accurate evaluation of your home’s value. She can answer your questions about home equity calculations, the real estate market, and any other questions you have about selling your home.