Your Home Equity Can Offset Affordability Challenges

Dated: September 19 2023

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Your Home Equity Can Offset Affordability Challenges

Are you contemplating the sale of your house? If so, the current mortgage rates might be causing you to hesitate. Some homeowners are concerned about selling and potentially facing higher mortgage rates on their next property. If this concern resonates with you, it's essential to understand that despite the elevated rates, home equity is also at a high level. Here's what you should be aware of.

Bankrate provides a clear explanation of what equity is and how it accumulates:

Home equity is the portion of your home that you’ve paid off and own outright. It’s the difference between what the home is worth and how much is still owed on your mortgage. As your home’s value increases over the long term and you pay down the principal on the mortgage, your equity stake grows.”

In other words, equity is how much your home is worth now, minus what you still owe on your home loan.

How Much Equity Do Homeowners Have Now?

Lately, home equity has been experiencing a more rapid growth than you might expect. To provide some perspective on just how much the typical homeowner has gained, CoreLogic has this to say:

“. . . the average U.S. homeowner now has about $290,000 in equity.”

This is primarily due to the substantial increase in home prices over the past few years. These rising prices have contributed to your equity accumulating at a faster rate than the typical pace. While the market is gradually stabilizing, there is still a greater demand for homes than there are available properties for sale. This heightened demand is once again pushing home prices upward.

According to data from the Federal Housing Finance Agency (FHFA), the Census, and ATTOM, a property data provider, nearly two-thirds (68.7%) of homeowners have either completely paid off their mortgages or have accumulated at least 50% equity. (Please refer to the chart below for a visual representation):

That means nearly 70% of homeowners have a tremendous amount of equity right now.

How Equity Helps with Your Affordability Concerns

In the current landscape of affordability challenges, the equity you've built up in your home can make a significant difference when you decide to make a move. Following the sale of your current house, you can utilize the accumulated equity to facilitate the purchase of your next home. Here's how it works:

  • Be an all-cash buyer:  If you've been residing in your present home for an extended period, there's a possibility that you've amassed enough equity to buy a new house without the need for a loan. In such a scenario, you won't have to borrow any funds or be concerned about mortgage rates. As stated by the National Association of Realtors (NAR):
“These all-cash home buyers are happily avoiding the higher mortgage interest rates . . .”
  • Make a larger down payment: 
  • The equity you've accrued can be employed as part of your next down payment. In fact, it might be substantial enough to enable you to make a larger down payment, reducing the amount you need to borrow and, consequently, making today's interest rates less of a concern. Experian provides further insight into this:
“Increasing your down payment lowers your principal loan amount and, consequently, your loan-to-value ratio, which could lead to a lower interest rate offer from your lender.”

Bottom Line

If you're contemplating a move, the equity you've accumulated can have a significant impact, especially in today's market. To determine the amount of equity you currently have in your existing home and explore how you can leverage it for your next property, I encourage you to get in touch with us. We'll provide you with valuable insights and guidance tailored to your specific situation.

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