The housing market continues to improve nationally through the current crisis. Industry forecasters expect pent up demand and low supply to push home prices higher in the months to come, even at historically low mortgage interest rates. If you already own a home, you’ve got an asset with intrinsic value that is likely appreciating. Here’s how you can put your home’s equity to work for you.
The Value Hidden in Your Home
The money you pay into your home provides you two things: a haven for raising a family and an appreciating financial asset.
Your home increases in financial value in two ways. One is active: You pay for your home, starting with the down payment and then with the principal portion of each subsequent monthly mortgage payment, and your equity grows.
The other source of increased value requires no effort on your part. Your equity grows as housing prices appreciate throughout the market. Appreciation isn’t guaranteed, since downturns in the economy can soften values. But in general, a rising U.S. population keeps supplying new generations of home buyers, so long-term growth prospects remain solid. In areas where housing stock is low, housing prices are even more likely to rise.
Tapping Your Home’s Equity
If your home is a great fit for you and your family in terms of size and neighborhood, remember that it is your home first and a financial asset second. But if, for example, your starter home is bursting at the seams as your growing family demands more space, then tapping into its value can help your move to a place that better suits your needs.
To determine how much equity is available to you, first determine your indebtedness. Log in to your mortgage company’s website, go to your personal account page, and find your balance still owed on the home. By subtracting this indebtedness from the amount you paid for the house, you’ll see your paid-in equity.
Next, determine your appreciated value by finding out the market value of your home. A real estate agent can provide you with “comps,” which are comparable values for homes similar to yours sold in your area over the last six months or more. Sales prices are more important than listed prices, because what matters most is what buyers are actually paying for houses like yours.
To get the projected total gross equity available from your home’s paid-in equity plus appreciation, subtract your indebtedness from the anticipated market value of your house.
When selling your house, you must also subtract real estate commissions and seller’s closing costs to arrive at the net equity takeaway. Be sure to check whether your mortgage company imposes prepayment penalties for paying off the mortgage early. These penalties could further reduce net equity.
Buying the Next House
How much of the equity from the house you sold will you put into the next one? Will you roll part or all of the proceeds into your new home, or even add in additional cash? Much depends on the price of the new house and what percentage of the purchase price you wish to pay as a down payment. One factor to consider is that lenders generally require you to purchase private mortgage insurance, or PMI, if you make a down payment of less than 20 percent of a home’s purchase price.