In this week’s MortgageRight moment we take a look at why now is the right time to sell your home for the most equity.
The current situation is undoubtedly ripe for maximizing on your home’s equity. Although there is
potential for housing values to increase even further in the next few years based on COLI alone, this
prediction must be analyzed with the other market conditions that factor into the equation.
- The newcomers to our town are sure to tell their peers about the lower cost of homes, but the
next round of transplants is sure to expect those prices to be similar to what their colleagues
have seen and not another 10% more. - The initially sluggish, new home construction market will soon overcome the deficiency in existing
home stockage, too. As the newer SARS-CoV-2 variants become less and less fear inducing, the
US Census Bureau’s figures indicate that builders will be able to bridge the gap within the next
18-24 months. - Baby Boomers, who own approximately 1/3rd of the existing houses are beginning to “age out”
of their homes, which will soon flood the market as competitive inventory.
As the supply and demand begin to balance, the home value increases will even out and may even take
a slight dip from the top of the bell curve. When you figure in the likelihood of interest rates rising starting
in the second calendar quarter of 2022, people will be forced to buy lower-priced homes than they could
have with lower rates – yet another factor that could pull housing prices down slightly.
All things considered, the market suggests that selling your home or refinancing now is a better
opportunity than it has been for a decade but will not likely get any better in coming years.
The next major timing consideration is planning where you will go if you do sell your home.
Moving to another location will put you up against the same supply-demand imbalance that drove up
home values in the first place. It doesn’t necessarily make sense to relocate for the sake of relocating if
there is no benefit to be obtained – especially if the home loan has been paid in full already. This is also
true for people who view their current location as either a “forever home” or plan on passing down the
ownership of the home through inheritance. In some cases, a refinance would be the wisest option to
capitalize on the higher equity, which we will discuss later in greater detail.
However, if you don’t plan on living in your home forever or plan to make the home a generational asset
through inheritance, selling your house makes a lot of sense, especially if you are ready to downsize or
don’t mind renting for a temporary amount of time.
Using the proceeds from the sale of your house, including all the newly acquired equity, would make for
a substantial down payment for a smaller home in a downsizing scenario. This would greatly reduce your
monthly costs and may even leave some extra money available for paying off other debts – a wise idea
indeed for those considering retirement.
If you are comfortable moving into a temporary location for a couple of years, the cash obtained from
the sale of your home can be placed into an interest-bearing account while you wait for the supply and
demand curves to stabilize. As the movement of Boomers out of their homes and the new construction
boom floods the market with inventory, you will soon find yourself in a very favorable position to
purchase or build your dream home.
What Do I Stand To Gain By Selling?
If you are in a position to utilize your biggest investment in the pursuit of building wealth by either selling
your home or refinancing, the next item to contemplate is the cost-benefit analysis. This is best done by
discussing the selling option with a licensed Realtor or the financing option with a licensed Mortgage
Loan Originator. They can provide you with real time data on market trends, local comparisons, interest
rate fluctuations, and closing cost figures. For those not quite ready to take even that first step, the
following scenario provides a conservative vignette of what to expect.
For the sake of this example, let’s say you purchased your home in January 2018 for $176,345 at 4.125%
on a conventional loan with no discount points, 20% down to avoid mortgage insurance and, for
whatever reason, never refinanced to get a better rate. Since purchasing your home, you have paid
$10,120 towards the principal and $22,014 towards interest. If your home value had not changed, the
amount of equity you hold on this investment would be the total of the down payment ($33,069) plus
the total of payments made against the principal ($10,120), resulting in a net of $45,389. That is a
substantial value, however not everyone can afford a 20% down payment, so this number is significantly
less for borrowers who used VA, USDA, or FHA financing to purchase the home. Those individuals would
be facing an equity total closer to the $10-12k mark.
With the recent rise in equity, let’s assume that same home could now be sold for at least $264,000. This
is a conservative figure identified with historical pricing found in both Homebot and Zillow for the 35801
zip code. Even with this “safe” home value, the amount of equity for that same home jumps from
$45,369 to $133,024 when you factor in the differential between the new sales price and the old
($87,655).
Further assuming that you sell the home without any Seller credits offered to prospective Buyers – as is
the current trend in our market – you would pay out up to 6% of the sales price in commission to your
listing agent, or $15,840. This would have you walking away with roughly $117,000 in cash on a house
you financed only 4 years ago for $176,345. This is literally a once-in-a-lifetime opportunity! This kind of
money can truly be life changing, especially considering that no capital gains taxes will be realized if you
have lived there for at least two of those last four years.
What you decide to do with all that money is a whole different topic and it would be wisest to seek
counsel from a licensed wealth manager. But to advance our existing scenario, let’s see how that money
works for you without buying jet skis and a G-Wagon. Your original monthly payment was presumably
around $875 / month including principal, interest, taxes, insurance, and HOA dues. For the sake of the
example, let’s also assume you own a car on which you owe $17,000, have $6,500 in credit card debt,
and are paying off an unsecured personal loan of $5,500 (all of which are based on the national averages
determined by the St. Louis Federal Reserve.
Using your newly acquired wealth, you decide to pay off those debts right out the gate, leaving you
$88,000 in remaining funds. You’ve now reduced your monthly debt payments by around $800 / month
depending on their individual interest rates and terms. With the net proceeds, you decide to build a new
home at $325,000 – customized perfectly to your specifications. Many people never believe they would
have the opportunity to do such a thing, but here you are! And it gets better. Let’s say you decide to put
20% down ($65,000) on another conventional loan, this time with a better rate of 3.25%. The rate alone
saves you $110 per month on mortgage payments, and you have no added cost associated with PMI.
You also have enough cash to cover the closing costs and prepaid reserve items (around $8,700).
Without dipping into your savings or retirement accounts whatsoever, you have upgraded to a custom
home worth twice as much as the one you bought only four years ago and even have $14,300 left for
moving expenses and installing a new hot tub on the back patio. Even better, you are decidedly out of
debt, own your vehicle outright, and while your mortgage payment has increased by $500 per month,
your total overall monthly expenditures is less than before: $1,376 (mortgage only) versus the previous
$1,675 (mortgage, vehicle, credit cards, unsecured loan) – putting another $300 in your pocket each
month!
So, let’s go over this again – simply by capitalizing on the equity in your home by selling when the time
is right, your new life looks like this:
And this is just when using a conventional loan – for those that qualify to use the VA on new construction,
you might even consider not making a down payment at all. While your monthly mortgage payment
would invariably rise to around $1,700, it’s still only $25 per month more than you were paying
previously (including all other debts) and you would have another $65,000 to put into an emergency
fund, invest, or apply to a retirement account.
Of course, this vignette assumes much and is subject to many variables. Again, the best way to assess
the benefit of selling your home would be to consult licensed professionals.
We at Amanda Howard Sotheby’s International Realty would be happy to help you evaluate the value of your home. To stay up to date with the different services that MortgageRight provides please visit their website here.
