But before you start packing boxes and scouring listings, how will you buy this next home? Have you considered leveraging the equity in your current home to purchase your next one?
If not, you’re missing out on maximizing your assets and making your dream home a reality. In this guide, I’ll show you how to leverage the equity from your current home to purchase a new one.
Understanding Equity: The Key to Unlocking Your Home’s Value
First things first: let’s talk about equity.
Equity is the difference between the current market value of your home and the amount you still owe on your mortgage.
For example, let’s say you own a house that’s worth $300,000 in today’s market. However, you still owe $200,000 on your mortgage. To find out your equity, you simply subtract the amount you owe on your mortgage from the current market value of your home.
Market Value of Home: $300,000
Amount Owed on Mortgage: $200,000
Equity = Market Value of Home – Amount Owed on Mortgage
Equity = $300,000 – $200,000
Equity = $100,000
So, in this example, your equity in the house is $100,000.
Essentially, it’s the portion of your home that you truly own outright. As you make mortgage payments over time and the value of your home appreciates, your equity grows, providing you with a valuable asset that you can leverage to finance your next home purchase.
1. Calculate Your Home’s Equity
The first step in leveraging your home’s equity is to calculate how much equity you have available to tap into.
Start by determining the current market value of your home.
You can do this by researching recent sales of comparable properties in your area or by consulting with a real estate agent (how about the Kat Nate team?!) who can provide a comparative market analysis (CMA).
Once you have an estimate of your home’s value ($300,000), subtract the amount you still owe on your mortgage ($300,000 – $200,000) to calculate your equity ($100,000).
2. Explore Your Financing Options
Once you’ve determined how much equity you have available, it’s time to explore your financing options.
One common way to leverage your home’s equity is through a home equity loan or line of credit (HELOC).
A home equity loan allows you to borrow a lump sum of money using your home’s equity as collateral, while a HELOC provides you with a line of credit that you can draw from as needed.
Both options typically offer lower interest rates than other forms of borrowing (credit cards, etc.), making them an attractive choice for homeowners looking to finance a new home purchase.
On the other hand, let’s say you don’t plan to keep your current home when you purchase the new home.
3. Use Your Equity as a Down Payment
One of the most common ways to leverage your home’s equity to purchase a new home is by using it as a down payment.
By tapping into your home equity, you can increase your purchasing power and potentially qualify for a larger loan amount or better terms on your new mortgage.
This can open up a wider range of options when it comes to finding your dream home, allowing you to upgrade to a larger property, a better neighborhood, or a more desirable location.
You’d do so by selling your current home and with the profit after the sale, use it as the Down Payment for the next home.
4. Consider a Bridge Loan
If you need to purchase your new home before selling your current one, a bridge loan may be a viable option.
A bridge loan is a short-term loan that allows you to access the equity in your current home to finance the purchase of a new one.
Once you sell your existing home, you can use the proceeds to pay off the bridge loan.
While bridge loans typically come with higher interest rates and fees, they can provide a convenient solution for homeowners who need to close on their new home quickly without waiting for their current home to sell.
5. Consult with a Real Estate Professional
Navigating the process of leveraging your home’s equity to purchase a new one can be complex, so it’s essential to consult with a knowledgeable real estate professional (like us!) who can guide you through the process.
We can help you assess your home’s value, explore financing options, and develop a strategic plan to maximize your equity and achieve your homeownership and investing goals.
We can also provide valuable insights into the local housing market and help you find the perfect new home to suit your needs and budget.
6. Evaluate the Risks and Benefits
Before leveraging your home’s equity to purchase a new one, it’s crucial to carefully weigh the risks and benefits involved.
While tapping into your equity can provide you with valuable financing options and help you achieve your homeownership goals, it also comes with risks, such as the potential for higher monthly payments, interest costs, and the risk of foreclosure if you’re unable to repay the loan.
Be sure to thoroughly evaluate your financial situation and consider consulting with a financial advisor to ensure that leveraging your equity is the right decision for you!
Remember, leveraging the equity from your current home to purchase a new one can be a smart and strategic move, providing you with valuable financing options and helping you achieve your homeownership goals.
By understanding your home’s equity, exploring financing options, consulting with a real estate professional, and carefully evaluating the risks and benefits, you can leverage your equity with confidence and unlock the door to your dream home.