Calculating Your Home Equity
Your home equity is your financial stake in your home. If you are like most people, it can make up a large portion of your net worth. Therefore, it's crucial to know how much equity your home has before you sell it or consider borrowing equity from a line of credit or home equity loan.
What Is Home Equity?
Your personal financial investment in your house is called your home equity. Your home's fair value is less any existing liens or mortgage balances -- plus the mortgage debt.
Important to remember that your equity in your home is not equal to your net proceeds. Closing costs, as well as other fees associated with the sale of your house, will be due. These costs are deducted directly from your equity before you can access the money. This reduces your overall profit.
How Does It Work?
Your equity is your down payment amount when you buy your first home. Your equity will increase as you pay down your mortgage balance. Any payment that is applied towards the principal will also increase. Your equity will also increase as the value of your home rises in line with the local real estate market. Your equity and net worth will increase in an ideal world where the market is healthy, appreciating, and you have a stable market.
Your equity can increase in three ways. First, no matter how much equity you have, it is always better to have more. Second, you can use it to buy a house, get a second mortgage, or even get a reverse loan.
Mortgage Payments Increase Equity, And Equity Increases
Part of your mortgage payment goes towards principal and part toward interest. You may also have to pay property taxes or homeowner's insurance, but let's not get too technical. Instead, let's focus on the parts that impact your equity. Your equity is built from the principal.
The bulk of your monthly payment will go towards interest at the beginning of your mortgage. An amortization plan is a change in principal and interest payments over time. Your loan's length, interest rate, and how long you have been paying it will determine when the balance will shift. In this case, most of your payments will go to principal. This will help you build equity faster.
Market Appreciation Increases Equity. Equity Goes Up
Your home's value will increase over time as long as the housing market is healthy. However, your timing will determine how much equity you gain and if you lose equity.
Negative equity can result from buying at the peak of the market in 2006 and trying to sell it during the Great Recession. Negative equity, also known as "being underwater," is when your home owes more than its value. It is rare to be underwater on your loan, as markets tend to appreciate over time.
Home Improvements Increase Equity
Home improvements can increase your equity. When done with strategy and budget in mind, home improvements can increase the value of your home, which in turn will increase your equity stake.
Minor kitchen remodeling, exterior improvement, bathroom remodeling, and basement finishing are some of the most sought-after home improvements. Although it is rare to get a 100% return on investment in home improvements, you can make some progress if you have a strategic approach. However, be sure to only make improvements that buyers will love and not over-improve.
How To Calculate Your Home Equity
You probably want to know the amount of equity in your home. In addition, it's helpful to know how much equity you have if your home is up for sale.
Many people don't have their own homes. According to the research, 59% of homeowners still have a mortgage on their homes. Calculating equity is not as simple as assessing the market value of your home.
Find Out How Much Your Home Is Worth
It may be worth more or less depending on the date you bought your home. Run the comps to determine how much your home is worth. Your real estate agent can also provide an estimate based on comparable properties that have recently sold in your area.
Let's look at an example: In June 2013, you bought your home for $250,000. You paid 20% down and received a 4.7% interest rate. Your home today is worth $315,000.
Add Your Loan Amount To The Equation
You will now need to account for your mortgage balance. To get an estimated settlement statement or a loan payment amount, contact your mortgage lender.
Your loan repayment is different from the monthly loan balance. Your monthly statement only calculates your loan payment once per month. A loan payoff includes interest up to the estimated closing date. If you sell soon after purchasing, your loan payment might include a prepayment penalty. We'll assume that your closing date is today for the purpose of this exercise.
Your equity equals your home's current value if you don't have any outstanding mortgage balance.
Example Following the same example as above, and with your 20% downpayment, you borrowed $200,000. Your loan balance in June 2019, after six years of monthly mortgage payments, is $176,472 with your current 4.07% interest rate.
The Difference Is Your Equity
Add your current home market value to your loan balance.
Example: The fair market value of $315,000 less $176,472 loan repayment amount equals $138 6,628.
This does not mean that you will make $138,628. You will still have to pay closing costs. These can include taxes, escrow fees, and agent commissions. They can all amount to 8% to 10% of your sale price. For example, you'll get $124,765 if you pay 10% closing costs.
Get into the details to maximize your profit. You may also want to deduct any money spent on getting your house ready for sales, such as home repairs and staging.
What Amount Of Equity Is Required To Sell My House
You will need at least enough equity for closing costs, commissions, and any liens to sell your house. Liens are any outstanding debts that you owe on your property. This could include if you have not paid a contractor, are late on your property taxes, or your HOA dues.
You will need equity to pay off your debts. Keep in mind that closing costs can range from 8% to 10% of the sale price. This includes agent commission and 2%-4% for any other charges.
Home Sale Price Closing Costs (8% to 10%)
$175,000 $14,000 - $17,500
$225,000 $18,000 - $22,500
$275,000 $22,000 to $27,500
$325,000 $26,000 - $32,500
$375,000 $30,000 - $37,500
$425,000 $34,000 - $42,500
$475,000 $38,000 - $47,500
$525,000 $42,000-52,500
$575,000 $46,000 - $57,500
$625,000 $50,000 - $62,500
A short sale might be an option if you have negative equity or are at risk of losing your home due to missed payments. However, it can be difficult. Because they will be paying less than what they owe, your lender will need to accept it. It can also have a negative effect on your credit score.
What Happens To Equity After You Sell Your House
Your home equity is transferred to you when you sell it. This includes closing costs, mortgage balance, and any outstanding liens.
Here's How It Works:
The buyer or their lender transfers funds into the escrow account.
The loan amount paid off by your escrow agent will determine how much you pay off your mortgage. They will also pay any outstanding liens.
Transaction fees paid by your escrow agent include commissions and property transfer taxes. Prorated HOA fees are also covered.
The remainder proceeds are transferred to you, the seller. The remaining proceeds are transferred to the seller.
What Is The Time It Takes To Sell My Equity?
The average time it takes for a home to go under contract and close in 45 days. However, this doesn't account for the time required before you accept (or receive) an offer. The average U.S. home stayed on the market for 65 to 93 days from when it was listed until closing in 2018. The market time depends on seasonality, market conditions, and demand.
The buyer's loan process is a major factor in the time it takes to close on a house. According to the report, 77% of buyers use a home loan to buy a home. However, there are certain conditions they must meet before they can "clear to close." These include completing an appraisal as ordered by the lender and having all the paperwork ready.
The following steps can help you unlock equity faster than two to three weeks.
Search For An All-Cash Buyer: Cash buyers are more likely to close quickly since they don't need a lender. To speed up the process, they may also waive contingencies. However, you will still need to spend time finding your cash buyer.
What Happens To Equity When You Reverse Mortgage?
A reverse mortgage allows you to gradually give up equity in return for monthly cash payments. This is a way to get equity from your home, even if you don't want to sell it. It is available to homeowners who are over 65 and have substantial equity in their homes.
What Equity Do I Have To Lend?
There are a couple of options available to you if you need to access your equity to pay for home improvements or other expenses.
Here are some common reasons homeowners might choose to get a HELOC or home equity loan:
If the interest rate on student loans is lower, you can pay for college
Home improvements that increase the value of your home
You can invest in other types investment that offers a higher return
High-interest debts should be paid off
Make sure you have an emergency fund in case of unplanned expenses or medical bills
The Traditional Home Equity Loan
A home equity loan can be a lump-sum loan that you repay in monthly payments over 5 to 15 year periods. The equity in your home is what secures it. These are the key characteristics of a home equity loan.
Interest Is Due On The Entire Amount: For example, when you apply for a home equity loan, you first request a dollar amount and then pay interest on that amount. The amount you borrow will determine how much you pay each month.
Fixed Interest Rates: Home equity loans have a fixed rate that will not change over the loan term.
Home Equity Line Credit (HELOC)
A HELOC is similar to a home equity loan. It uses your home's equity for collateral. However, it differs from other loans in several key ways.
This Is A Revolving Credit Line:
A HELOC lets you borrow against your equity in your home as needed instead of borrowing a fixed amount up front. As a result, you can draw what you need, depending on your financial situation. A HELOC can usually be opened to a loan-to-value ratio of 85%.
Interest Is Only Due On The Amount Borrowed:
Like a credit card, you only pay interest for the amount borrowed, not the total amount approved.
Interest Rates Can Be Variable:
Your interest rate will depend on the prime rate. This is good news for rates that drop, but it can also be bad news for rates that rise.
