If you are considering selling your current home to buy a new one, one of your biggest concerns is likely finances. Mortgage rates are still considered relatively high which means a home loan for the new house is going to cost you more. This also means your monthly payments may be higher than you were planning for or are comfortable with based on your budget.
One solution to make your new home more affordable is to put more money down as a down payment, but building up that cash may take longer than you want to wait to purchase a new home. The solution to your financial conundrum may be your home equity.
Home equity is the difference between what you owe on your mortgage and the current value of your home. While mortgage rates have trended upwards over the last few years, so have home values. And while the increase in home prices may have slowed a bit from its peak, values continue to rise as there is still higher demand for houses than there is available supply.
As those values increase and you pay down the principal on your current mortgage loan, your equity in your home grows.
That equity can make a big difference in your ability to afford the home you want. With that money, you may be able to pay cash for your new house. Or, it may enable you to put down a large enough down payment so you don’t have to borrow as much and you can get your monthly payments where you need them to be.
So how do you know how much equity you have in your home?
You must first find out the value of the home before you can calculate the equity. There are two ways to do that, but keep in mind both ways only return an estimated value.
- Home appraisal. Getting your home appraised is the most accurate way to determine its value in today’s market.
- Looking at comps. You could also research recent comparable home sales in your area or check the MLS for similar listings to estimate the value of your home.
Once you have the most accurate value you can get, deduct that number from your outstanding mortgage balance to get the value of your home equity. It’s that simple.
Now, if you don’t have enough equity built up to help afford a new house, there are things you can do to build more equity. Focus on paying down your mortgage faster by putting more money than you owe each month towards the principal. Also consider doing any renovations or upgrades that may add to the value of the house. Taking these steps will help you build enough equity to make your dream of buying a new home a reality.