Are you lusting after a bigger home? 🏡 Have you and your family been feeling cramped in your current home? Perhaps you’ve been dreaming of:
- an extra bedroom?
- a larger yard?
- your very own home office where you can close the door to all the distractions and finally, truly, focus?
If you’ve owned your current home for more than a few years you might actually already have the ticket to your dream home tucked away in your current one.
In the South Jersey real estate market, we’ve seen incredible home price appreciation — especially since 2020 — which means homeowner equity has flown 🕊️. Let’s delve into how you can use your home’s equity to land the home you really want:
What Is Equity?
It’s like the best piggy bank you’ll ever own; as your property appreciates (and you keep paying off your mortgage) you accumulate equity 💰. As a mathematical equation, it looks like…
Your home equity =
your home’s current market value - (minus)
your remaining mortgage balance
If you’re wanting to move from your current home onto your next, here’s some reasons why you could put your accrued equity to use:
- It’s “free money”. At the least, the portion of equity you’ve accrued via home price appreciation (i.e. the amount you haven’t contributed to) is essentially “free money”. It’s equity you’ve gained simply by the housing market being awesome. You could compare it to some stocks you buy, where they might double in value after 5 years of owning them. Except we're confident the South Jersey housing market is a far "safer" investment than the stock market, based off historic patterns.
- Downpayment boost: The equity can make for a substantial downpayment on the next home, reducing your monthly bills.
“The average homeowner gained around $33,400 in home equity between Q2 2020 and Q2 2021. That’s a huge chunk of a downpayment.”
CoreLogic
So now we've established there’s plenty of opportunity in your home’s equity, let's talk about...
How To Access Equity
There are several ways you can access the equity in your property. You could apply for a Home Equity Loan, which is essentially a second mortgage. This might work great for you if you have a specific amount in mind for your next home's downpayment. Once you apply for the Home Equity Loan and it is approved, you have access to the lump sum immediately and you'll start repaying the loan immediately.
Similar to a Home Equity Loan but offering more flexibility is a Home Equity Line of Credit (HELOC). Think of this instead like a credit card, where you're allowed a line of credit up to a cap (using your home as collateral). With a HELOC, the mortgage lender or bank will establish the maximum amount you can borrow (based on the equity you have in your home), but you won't receive the amount as an immediate lump sum; instead you can choose when you want to start drawing from the 'pot', and you'll only start repaying the HELOC once you've started pulling money out of it.
And finally, another popular product homeowners might use is a Cash-Out Refinance. This replaces your existing mortgage with a larger one, and you pocket the difference to do with what you like. Since a huge majority of homeowners now have <4% interest rates (from either buying during the pandemic or refinancing), this product might be less popular than the first two options, since you'll be 'losing' that lower rate.
There’s a lot to know about using the equity in your home to move onto the next, so be sure to speak to a trusted local mortgage lender about it.
👱♀️🔍 Seeing Equity Unlock In Action
Let’s take a look at an example of how a homeowner moved house by using equity to make that process more seamless: Sadie bought her condo in Marlton New Jersey about six years ago for $180,000.
Over the years, Sadie has paid off around $30,000 of her mortgage — go Sadie! And, the best part, due to the competitive nature of the real estate market locally, the property is now valued at, incredibly, around $330,000.
How did Sadie arrive at this valuation? She reached out to a local real estate agent with 5⭐️ reviews and a crazy-educational social media presence. The agent ran the “comps” (comparing Sadie’s condo to similar-sized condos that sold within the last few months) and arrived at an estimated valuation of $330,000.
Getting married was the push Sadie needed to decide to sell her condo. Her and her spouse decided they wanted to move into a single family home that had 3 or 4 bedrooms with a yard so that they had room to grow if they started having kids.
With no savings (Sadie funnelled all her extra cash into paying off her mortgage) she knew she couldn’t buy non-contingent. Due to the competitive nature of buying in South Jersey, Sadie’s realtor informed her that contingent offers have a lower chance of being accepted. So, they ran through her options with a mortgage lender.
After looking at various equity unlock products, Sadie decided opening a Home Equity Line of Credit (or HELOC) is the right choice to help fund her next property using the equity she’s accrued (and be able to put a non-contingent offer on their next home). Next, Sadie strategizes with her agent about her ideal home. They discuss the amount she’ll likely need for:
- the downpayment on that home
- the closing costs for the transaction
They decide $50,000 should cover everything she needs, and her mortgage lender goes about applying for the HELOC for this amount. The HELOC takes a few weeks to get set up, and since Sadie doesn’t yet know when she will move, this new line of credit gives her flexibility to jump on the right property when it comes on the market.
Using Equity To Upsize — Step By Step
Now let’s go over all the steps you’d take:
1️⃣ Determine Your Equity
- Get a Professional Valuation: Start with an appraisal or a comparative market analysis from a real estate agent to know your home’s current value.
- Calculate Your Equity: Subtract your mortgage balance from the current market value of your home to figure out your equity.
2️⃣ Explore Financing Options
- Consult Financial Experts: Speak with a mortgage lender to understand which equity-tapping option best suits your needs.
- Choose Your Loan Type: Decide between a Home Equity Loan, HELOC, Cash-Out Refinance, or Bridge Loan based on your financial strategy.
3️⃣ Get Pre-Approved
- Gather Documentation: You'll need financial documents, like W2s, tax returns, and pay stubs for loan approval.
- Pre-Approval: Apply for pre-approval to understand how much you can borrow and present yourself as a serious buyer.
4️⃣ Plan Your Purchase and Sale
- If your plan is to put in an offer on your new home, and either get under contract or close, before even putting your existing home on the market, you need work with your real estate agent to start househunting. Your agent should set you up with property alerts, take you to view homes, and strategize with you over what offers you should be putting in.
5️⃣ Put Your Current Home on the Market
- List Your Home: With the help of your real estate agent, list your home to get the best possible offer.
- Spend some time cleaning and decluttering your property so that it looks best in the professional photos and for showings. If you’ve already moved out of the property, considering hiring a staging company to fill your home with beautiful furniture and decor, to really make it shine.
6️⃣ Close on Your New Home
- Finalize the Financing: Work with your lender to finalize the loan, using your equity as planned.
- Close the Deal: Complete the home-buying process by closing on the new home, which may involve using funds from your equity loan as a downpayment.
7️⃣ Move In and Settle Your Loans
- Coordinate Your Move: Plan the move to your new home. You might want to hiring professional movers, at moving trucks to DIY. Consider hiring a professional cleaner after you vacate, as you’ll be expected to leave your property 'broom clean’ for your buyers.
- Adjust Your Finances: If you used a Bridge Loan, pay it off with the proceeds from your sale. If you chose a different equity loan type, start your new repayment schedule.
8️⃣ Enjoy Your New Home
- Relax and Unpack: You’ve successfully upsized! Now it's time to enjoy the additional space and comforts of your new home.
Using equity to buy a new home...
...can be a great financial move, but it’s important to proceed carefully and consider the risks and benefits of tapping into your home’s value.
Always seek advice from real estate and financial professionals to guide you through this process.
