Are you looking to buy a new home but don’t have the savings or credit score to make it happen?
You may be able to use your current home equity as part of the purchase process. Home equity is the value of your property minus any outstanding debts, such as mortgages and liens.
By leveraging this amount, you can potentially finance a portion of your next home purchase without having to take out an additional loan. Here’s how you can use your home equity when buying a new residence.
Why You Should Use Your Home Equity
Benefits of Using Home Equity
Using your home equity to purchase a new home can be a savvy financial move. It can offer lower interest rates than other types of loans, potentially saving you thousands over the life of your loan.
Risks and Cautions
However, using home equity isn’t without its risks. The most significant risk is that if you default on your payments, you could lose your home. Thus, it’s essential to make this financial move wisely and cautiously.
Selling Your Home
The first step in using your existing home’s equity for another real estate transaction is selling it. This will allow you to get cash for its sale price that can be used toward purchasing another house or condo.
Before putting it on the market, consider making improvements that could help boost its value and appeal – like painting walls, updating fixtures and landscaping around outdoor areas – so that potential buyers are more likely to place higher bids on it during negotiations.
Once sold, these funds should cover at least some of the cost associated with buying a new property if not all depending on what kind of deal was made with the buyer.
Calculating Home Equity
After selling your current home, you will be able to calculate how much equity is available for use. To do this, subtract the loan balance or remaining mortgage amount from the sale price of the property.
If there was a profit made in selling it, then you will have some money left over that can be used towards a deposit on another residence.
This amount will also depend on how much money was put down as an initial payment when first buying the property and how well it has appreciated over time.
The formula
Calculating home equity is relatively straightforward. You take the current market value of your home and subtract any outstanding mortgage balance.
An example
Let’s say your home is worth $800,000, and you still have $300,000 left on your mortgage. Subtracting the mortgage balance from the home’s value leaves you with $500,000—this is your home equity.
Buying A New Home
With your equity calculated, it’s time to start looking for a new property.
While the exact amount you can spend will depend on your personal finances and credit score, having existing home equity in your favor can increase the overall amount of money you have to work with when making an offer on a house or condo.
When negotiating terms for financing, be sure to mention the equity from your previous residence so that lenders may take this into consideration when determining what kind of loan they are willing to give you.
Talk To A Real Estate Agent
Before making any decisions, it’s best to consult with a real estate agent who can help you every step of the way and will be able to provide experienced advice on market conditions so that you can make smart investments when it comes to buying and selling homes.
They will also be able to let you know what kind of offers are reasonable for both buyers and sellers before entering into negotiations.
Bridget’s Final Thought
Using your home equity as part of the home-buying process can help make purchasing another residence more affordable and potentially even possible in certain cases.
Ready to start leveraging your home equity? Fill out the form below and let’s connect!