Today’s higher mortgage interest rates have many homeowners hesitant to sell their houses and buy new ones. But the skyrocketing home prices of recent years mean that many of those owners are sitting on substantial home equity. Here’s how that equity can soften the blow of higher interest rates.
Two factors increasing home equity
Your home’s equity is equal to the current market value of your home minus what you owe on your mortgage. Home prices have spiked in recent years; the Federal Housing Finance Administration reports that average home values have risen more than 57 percent in the last five years and just shy of 300 percent in the past 30 years. That increase in the current market value of your home has left you with greater equity than you might have anticipated when you bought it.
Meanwhile, American homeowners are staying in their homes longer. The National Association of REALTORS® reports that between 1985 and 2009, the average length of time a homeowner owned his house was 6.1 years. Today, it’s 9.3 years. That longer stay means homeowners have paid down a greater proportion of their mortgages, increasing equity. Longtime homeowners may have completely paid off their indebtedness.
The bottom line is that if you have a home to sell that you’ve owned for more than a few years, you likely have an equity cushion. CoreLogic, a company that provides consumer analytics, states that the average American homeowner now has more than $274,000 in equity in their house.
Lower the amount you finance
Armed with your equity cushion, you may well be able to make a significantly larger down payment when you buy your next home. That lessens the amount of the home’s purchase price you’ll have to finance, thus helping to alleviate the impact of higher interest rates. And in certain circumstances, such as when you have already paid off your existing mortgage, you may come away from the sale of your existing house with enough equity to pay cash for your next home.
If you need to sell your home – because you’re relocating for a job, because your family is growing because you’re ready to downsize – don’t let higher interest rates stop you. Instead, put your current home’s equity to work to help you pay for the next one.
Related – Growing and Using Your Home Equity