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How Much Equity Should I Have Before Selling My Home?
Homeowners who want to sell their homes but haven't paid off their mortgage loan should first ensure they have enough equity. If not, the proceeds of the sale would only go to paying the mortgage balance. But, how much equity does one need before selling a home?
The amount of equity you need before selling a home depends on your goals after the sale. If you plan to downsize or rent, you only need small equity. However, if you plan to move to a bigger home, you need at least 25% equity. This amount covers closing fees, the down payment of a new home or security deposit, and the money you'll need in preparation for your new life.
To understand equity and its role when you sell your home, we wrote this blog. Here, we went into detail on how to calculate home equity, how to make it grow, how much equity you need in your house before selling, and a lot more!
What is Home Equity?
According to Freddie Mac, home equity is the difference between your home worth and your mortgage balance. In other words, it's the amount of money from your home's value that you actually own or your financial stake in your property.
When you make monthly mortgage payments, your principal loan is reduced and you start building equity.
How to Calculate Your Home Equity
For you to determine how much more equity you need before you can proceed to a house sale, you need to learn how to calculate equity in the first place.
Calculating equity is quite simple. You just deduct your mortgage loan balance and any liens to the property from the actual home value.
Here it is in formula form:
Property Value - Current Mortgage Balance - Liens = Home Equity
Let's look at how you can estimate the value of your home as well as your remaining loan balance to calculate your home equity.
Home Market Value
Your home market value or fair market value is the price your house would sell for on the traditional housing market under normal market conditions. You can get this estimated value through an appraisal, online tools, or a comparative market analysis.
Getting a home appraisal is one of the most accurate ways to determine home values. Typically, professional appraisers do a traditional in-person evaluation of your property, but automated valuation models are also utilized these days.
Another way to identify the fair market value of your home is through online home value estimators. Usually, these online tools comb through public data and sales recordsof properties in your neighborhood.
You only have to fill out a simple questionnaire that includes the specifics of your property and you'll get your home's value in two minutes.
CMA Conducted by a Licensed Real Estate Agent
Real estate agents are experts in conducting CMAs or comparative market analysis. They use the sales records of recently sold homes in your area as benchmarks in their estimation.
The Mortgage You Owe
Apart from your home's market value, you should also figure out how much of your mortgage loan you still owe to your mortgage lender. Contact them directly to ask for an official payoff quote. It will include your unpaid principal, which you should subtract from your home value to get the equity amount.
You can also ask for a copy of this payoff quote online, as many mortgage services utilize online portals.
Does Mortgage Interest Count Towards Equity?
The short answer is no. Mortgage interest doesn't count towards equity. When you settle your loan's monthly payment, a portion of it goes to your principal loan and a certain amount goes to the mortgage interest. The portion that goes to your principal loan is the amount that counts towards equity.
In the early days of paying your loan, most of the money you pay will go to the mortgage interest. But as you progress in your loan amortization schedule, a huge part of your monthly mortgage payments will count on your loan's principal balance; hence, the rise of your equity.
If you want to know exactly how much of your payments goes to building equity, check out the amortization schedule the mortgage lender provided you when you took out the loan.
How Does Home Equity Grow?
Home equity doesn't grow overnight; however, it is worth knowing that you can grow it in a lot of ways.
Doing your best to grow your home's equity translates to a profitable house sale down the road...
As mentioned earlier, a portion of your monthly mortgage payments counts toward your home's principal and therefore increases your equity.
If you take out a 15 or 30-year loan, you don't only pay for your loan, but you also build wealth through equity.
A 15-year loan will allow you to build equity faster and pay lower interest. A 30-year loan gives you lower monthly payments, but you can increase your monthly payments and ask the lender to designate more money to the principal balance so you can grow more equity sooner.
This will also lower your loan's interest rate since it is computed based on the principal balance.
The down payment on a property also counts toward equity. So when you put in a large down payment, let's say 20%, you already own 20% of the home and you gain more equity from the start.
Note that you can also gain equity by putting in a down payment less than 20%; however, a portion of your initial monthly payments will go to private mortgage insurance (PMI).
Property Value Appreciation
Assuming that you don't sell your home on the real estate market immediately after buying it, its market value is expected to rise, making its equity grow.
According to the National Association of Realtors (NAR), the value of single-family homes saw a double digit increase in 2022 and continues to rise.
You don't really have any control over your property value's appreciation since it will depend on your local housing market. But often, the housing market is favorable over the long term and it lets you grow equity for your home.
As evident in the discussion above, as your home's value increases, so does its equity. What better way to add value to your house than to renovate and upgrade before you sell.
Usually, upgrades to modernize a house have a huge impact on its resale value, so you need to focus on them if you want your equity to build. Some of the most important projects to do to grow home equity are the following:
- Kitchen and bathroom remodel
- Landscaping or improvement of curb appeal (especially the front yard)
- Addition of an outdoor deck
- Energy efficient windows
- New or refinished wood floorings
- Basement and attic improvements
- Addition of game room, swimming pool, court, wine cellar, etc.
- Improved fencing
How Does Equity Affect the Sale of Your House?
Having equity in your house allows you to gain profit when you decide to sell. Remember that equity is the difference between your home's value and the mortgage loan you owe.
If you have enough equity, you can take home enough cash after you pay off your mortgage loan, capital gains taxes, and any liens on the property.
Your home's equity can cover closing costs as well as the licensed real estate agent fees. If it is that large, the money left can provide you with the down payment for a new home, moving expenses, and a budget to start your new life in a new dwelling.
Do You Have to Have Equity in the House Before Selling?
Technically, equity is not a requirement when you sell a house. You can sell your house even without equity, as it won't really affect the home buying and selling process. However, you will have to pay to sell your house...
It is ideal to sell your house when you have enough equity to ensure that your current mortgage balance, capital gains tax, personal loans (ex. car loans), and any liens on the property will be covered.
Further, it gives you enough funds to pay for the security deposit of a rental, the downpayment of a new home, buying your essential needs, and other expenses.
How Much Equity Do You Need Before Selling Your Home?
The amount of equity you need to have before selling depends on your reasons for putting your house up for sale on the real estate market.
If you are well-off and just selling your home to relocate, then you may not need much equity since you can settle the mortgage payment on your own.
It is also possible for you to need less equity when you are transitioning to renting, as most security deposits don't require more than a months rent unless you are moving to New York or other major cities.
Meanwhile, if you are planning to buy a bigger home for your growing family, you need at least 15% to 25% equity out of the selling costs. This is also true if you need to pay other debts.
Closing Costs and Seller Commission
Two of the major reasons why most homeowners wait for their home equity to build is to avoid paying closing costs and seller commission straight out of pocket.
According to NAR, the closing costs of a house sale are around 2% to 5% of the proceeds (this does not include seller commission). Many homeowners pay for the following during closing:
- Origination charges
- Service charges
- Prepaids and escrow payments
- Government fees
- Capital gains tax
- HOA fees
- Transfer taxes and recording fees
- Title insurance
- Attorney fees
- Credits for closing costs or sales costs
Apart from these fees, you also have to pay for a licensed real estate agent commission. This may vary from state to state, but generally, it costs 5% to 6% of the home's sales price. That puts real estate fees at 7% to 11% of the home's sales price!
What if I Don’t Have Any Equity in My Home?
All is not lost when your home doesn't have enough equity or has negative equity. You can still sell your home by getting a cash offer. If you are still paying for a mortgage, that means doing a short sale and using the money to pay off your mortgage servicer.
Since your home equity doesn't really impact anyone else but you, cash buyers and any potential buyers, in general, can still buy your home.
However, selling to a cash buyer will save you time. This is especially suggested if your house is about to be foreclosed and you need funds to pay off your mortgage loan.
Cash buyers close in as fast as seven days since they don't have to wait for any loan approval. They also buy houses as-is, so you don't need to put in any effort in repairing or renovating your property. In other words, getting a cash offer provides convenience.
Cash Offer Process
To get a cash offer, you will need to fill out a form on their website. They'll schedule a visit to your home and give you an accurate offer based on their informal inspection.
If you take their offer, they'll ask you to sign an electronic contract to seal the deal. The sale would proceed to the closing table, you'll get the money in your bank, and you'll be asked when you would like to move out.
Selling your house to a cash buyer gives you flexibility. It makes home sales a lot less stressful and overwhelming.
Final Thoughts: How Much Equity Should I Have Before Selling My Home?
Your goal as a homeowner is not only to maintain your property but also to grow its equity. You will benefit from this when you decide to sell your house on the real estate market.
Striving to achieve 25% equity in your home or higher before a home sale is recommended-- it will help you pay for certain fees, including the closing costs, licensed real estate agent commission, and down payment of a new home, among others.
If your home doesn't have enough equity, you still have a chance to sell your home and pay off your mortgage. Cash buyers purchase homes as-is and provide no obligation cash offers.
Here at Sell My House Fast, we give fair cash offers to homes that don't have enough equity. We'll help you get rid of your home as fast as you want without making any repairs.
When you're ready to save on closing costs, agent commission, and repairs, just fill out our form below or contact us at (844) 207-0788!