Knowing when to sell your home is a tricky business. One major factor, perhaps the most important factor, is timing the sale to maximize your equity. What does that mean? You don’t want to sell your home in July if it could be worth more in December (during which time you’ll also pay down your mortgage by a few grand). Building equity in your home not only means you’ll make more money when you sell, but also that you might be able to tap into your home’s value to pay for renovations, consolidate other debt, or fund your kid’s college tuition. Let’s down how to calculate home equity and what to do with the information.
What is Equity?
In short: The equity in your home is how much of the home you own. It’s also sometimes described as the available cash value. As long as your home’s value continues to incline, and your outstanding mortgage balance continues to decline, you will build equity steadily over time. However, it’s also true that the going rate for homes like yours can fluctuate unpredictably. If the real estate market in your neighborhood takes a sudden dive, your equity could also plummet. All of this is to say, your equity is a financial figure that illustrates the value of the loan-free portion of your home at any given moment.
Calculating Basic Equity
As Bank of America points out, the equation for available equity is quite simple. You just take the current appraised value of your home, subtract your outstanding mortgage balance, and voila: you’ve got a figure. For example:
If your home’s appraised value is $300,000 and you owe $130,00 on your mortgage, your current equity is $170,000. Whether or not that’s the best your equity will ever be depends on whether you take out a second mortgage, the real estate values hold in your area, and if your plumbing decides to go kaput. But for now — in this scenario you’re sitting pretty.
Finding Loan-to-Value Ratio
You may also want to know your loan-to-value ratio, or LTV. This figure is important if you’re trying to get a home equity loan. In order to borrow against your property, banks will want to translate your equity figure into a percentage. How much of your loan is paid off according to the current value? This is what the LTV determines. Generally, a lower figure is better. Some lenders require your LTV to be under 50% to be approved for a loan.
To calculate your loan-to-value, you begin with the current balance on your mortgage, then divide it by the appraised value. This will leave you with a decimal figure. Multiply that by 100 to get the percentage.
For instance, if you owe $150,000 on your mortgage and have an appraisal of $318,000, your LTV is 150,000 / 318,000 = .47. Multiplied by 100, the final result is 47%. That means the loan only occupies 47% of the home’s total appraised value. You owe the other 53% in equity.
What If You Don’t Have Equity?
Now, there are times where you have no equity or negative equity. That’s usually called being “upside down” in your mortgage. Maybe you bought your home for $300,000, still owe $250,000, but the appraised value is just $220,000 now. Market changes or damage to the property could be to blame. You may also have a loan with a monthly payment less than the interest rate — so you actually owe more than when you began over time. Either way, you may not make much (if any) money when you sell. If you owe a lot more than the property is worth, most banks will make you go through a short sale. This means they agree to let you sell for less than the outstanding mortgage and forgive the remaining balance.
If you have minimal equity, you can sell on your own — but the realtor’s fees will eat up any remaining profit. That’s where companies like California Family Homebuyers come in. We purchase homes in all sorts of conditions and can close as quickly as 7 days. If you don’t have enough equity to justify selling on the MLS (and you don’t want to make repairs to increase the value), give us a call! We may be just the buyer you didn’t think existed. You’ll walk away with a little cash and we’ll take over the property. Just like that.