The housing market has certainly changed in the last six months. Many people who otherwise thought they did not have 20% equity actually do have 20% equity as the low supply of homes available in the market against the amount of determined buyers continues to drive home sales up. The newly fueled appetite for real estate is creating a sellers’ market, people are now coming out of the woodwork to sell their homes by virtue of amassed equity.
Some important terms to become familiar with
Equity: defined as the amount in dollars between the current loan amount and appraised value. Example- a loan amount of $300,000 and its equity relationship to the valuation of $320,000 translates to $20,000 in equity (same as cash value for our purposes)
Loan-to-value: LTV for short -is the amount of loan against the value of the property. Using the same figures, a loan amount of $300,00/$320,000 translates to a loan to value of 93.8%.
What 20% equity in your home actually means
It means you have choices, choices with how you hold, encumber or use that property moving forward.
Following market advantages with 20% equity:
- Refinance– re-mortgage your home out of monthly mortgage insurance. If you presently have an FHA Insured Loan that you took out in the last couple of years, or even a Conventional Loan with monthly mortgage insurance, talk to a mortgage lender immediately. Average refinance savings is $300 per month.* Remember mortgage insurance benefits the lender, not the consumer. Ancillary benefit is a likely to be lower interest rate, anyway.
- Selling your home-need a larger down payment to buy the long term home? You can net the down payment from the sale of your current home for use on the new home you upgrade to. Of course realtor commissions are 6% from the net proceeds, so your net for the down payment is after commissions and applicable transfer taxes.
- Refi/Renting Out The Home For-as a rents are up in most markets, positively cash flowing your property by virtue of a lower payment (potential refinance). By refinancing out of mortgage insurance, net cash flow and subsequent net income improves.
- House To Offset New Mortgage Payment- more equity in your current home you plan to rent out can be more easily accomplished having 20% or more equity in your home for the purposes of using fair market rents to offset the mortgage payment. Granted in such a scenario you’ll need at least 30% equity to convert your primary home into a rental for the purposes of offsetting the payment, but you’re a lot closer there given that you may already be at 20% equity.
How to determine whether or not you have 20% equity in your home for lending purposes.
RELATED MORTGAGE ADVICE FROM SCOTT SHELDON
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