You’ve heard the phrase, but why is home equity something that you should desire? Simply put, home equity is the amount of money you receive when you sell your home at market value after repaying your mortgage. It’s one of the best reasons to consider buying over renting!
How to calculate
Already own your home and curious how much equity exists? You’ll need the following numbers before you calculate:
- Determine your home’s market value – Let’s face it. We all think our home is better than the neighbor’s. It’s best to seek your home’s market value from an unbiased third party (i.e. appraiser, real estate agent, etc.). While an appraiser will typically charge between $400-$500, your local trusted real estate agent will likely provide you a market analysis for free.
- How much you owe on your mortgage – Take a look at your mortgage statement and find your mortgage’s remaining balance.
Once you have the numbers above, simply subtract the amount you owe on your mortgage from your home’s market value. Voila! You’ve calculated your home equity!
For example: Your home has a market value of $250,000. The remaining balance on your mortgage is $202,000. By subtracting your mortgage balance from your home’s market value, we’re left with $48,000, the amount of your home equity.
Accessing your home’s equity
This can be tricky. Today’s lending guidelines don’t make it simple to access the equity in your home, especially when it’s a small percentage of your home’s value. Most loan programs limit “cash out” refinances to 80% Loan to Value (LTV), meaning you could borrower $200,000 on a $250,000 home. Another option is a home equity line of credit (HELOC). Currently, it’s realistic to find HELOCs that will finance upwards of 90-95% of your home’s value. Following the scenario above, you could access up to $237,500 of your home’s value with a combination of a first mortgage and HELOC.
Keep in mind when considering selling your home, that there are costs associated with marketing and transferring your property to the new owner. That will ultimately cut into the equity that you “walk with.” In Maryland, assume 6-7% of your home’s value will be spent selling your home.
What is the value of having home equity?
Your home is one of your largest financial investments, but it’s also the place that keeps us safe, where we raise families, celebrate milestones, and make memories. Knowing your home equity can help you plan for future big financial decisions (i.e. down payment for a future home, paying for your child’s college tuition, etc.).
The bottom line: your home equity is important, and you’ll want to make sure it increases each year you’re living in your home. Thinking of selling your home and using your home equity for your down payment? Contact our seasoned loan officers to start your conversation today: 410.878.9730.