Before Selling Your Home, Assess Your Equity

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The equity in your home plays a major role in how much profit you'll make off the sale, but it's not always simple to determine just how much of the home you own (even if you haven't refinanced). Here are a few tips to understand equity and how you can use it to your advantage.  

What Is Home Equity?

The simplest definition is that home equity is the difference between the market value and your current loan amount. When calculating, you should also take into account related financing (e.g., home improvement loans, second mortgages, etc.). If you owe more on the home than you owe, you have negative home equity.

Of course, the number you generate is just an estimate. Just because your market value is listed at a certain price, doesn't mean that a buyer will offer that amount. Overall though, it's a good place to start. Once you have a baseline, it can give you a better idea of how your home sale will go and what you can afford once you move out.  

The Bottom Line  

Let's say you bought a home for $150,000 and you've paid off $50,000 total. If your home was recently assessed at $400,000, then your home equity is now $300,000, even though you only owe $100,000. The longer you've owned your home, the more you'll pay toward equity as opposed to interest. 

But home sale profits aren't the same as home equity. You also have to deduct any expenses associated with selling the home, including staging, listing and real estate agent fees. This can take as much as 10% off the total sale price. Some lenders will charge a penalty fee for paying off the loan early, so you'll need to check your contract to understand your responsibilities. 

Equity and the Home Sale

Experts recommend having at least 10% equity in a home if they're making a lateral move. So if you need to relocate for your job and you're planning to move into a similar home, then you'll need less than someone who's upgrading their lifestyle. If you want a bigger and more luxurious home, it helps to have at least 15% — and preferably more. The less equity you have, the more likely you'll end up with negative equity. 

Equity can be confusing because you ultimately own the home while you're paying the mortgage payments. Your lender is simply using the value of the property as a type of collateral in case of default. You can think of equity as a form of leverage you can use to give you a little more confidence during the sale.