When you decide to sell your home it’s ideal to have equity to pay off your loan balance cover the closing costs and make a profit. During the closing process the buyers funds are used first to pay off any remaining loan balance and cover the closing costs. Whatever is left after that is what you receive as payment. If you plan on selling after buying your home it’s wise to check with your lender and inquire about any prepayment penalties that may apply to your loan.
To determine how much you still owe on your mortgage accurately obtaining the payoff amount is crucial. You can get this information by contacting your lender either through phone or online communication. It’s important to note that the payoff amount differs from the remaining loan balance stated in your mortgage statement because it includes accrued interest up, until the closing date making it a precise figure. Additionally when you request a payoff quote from your lender they will inform you of its validity period usually ranging between 10 and 30 days.
Equity refers to the stake or ownership that you have in your home.
The equity of your home is the amount of money you earn when you sell it after paying off your loan and deducting expenses related to the sale. Calculating your equity can be a little more complex if you have a home equity line of credit (HELOC) a home equity loan or any unpaid liens, on your property. Your home equity consists of two types; investment equity and earned equity.
Investment equity refers to the gain you accumulate in your home over time through factors such as;
- The initial down payment you made
- Monthly mortgage payments that go towards reducing the principal amount
- Any costs incurred for upgrades or renovations
Earned equity is only realized once you actually sell your property and includes;
- The increase in value due to rising real estate prices in your local market
- Returns, on investment resulting from improvements or upgrades made to your home
- Firstly you repay the loan to your mortgage lender.
- Any additional loans, such as a HELOC or home equity loan are also paid off.
- Next the closing costs are covered, which include agent commission, taxes, escrow fees and prorated HOA expenses.
- Lastly the remaining profit is transferred to you as the seller.
If your homes value hasn’t decreased since you purchased it and its worth more than what you owe on your mortgage you should make a profit when reselling. It’s important to consider that when calculating profits a portion of your equity will always need to be allocated towards transaction and closing costs.
What happens if I don’t have equity to pay off my mortgage?
If you don’t have equity to fully pay off your loan this is referred to as having equity or being underwater. In cases where you need to sell but lack equity (especially after considering closing costs) there are two options; either bring additional funds to cover the shortfall, at the closing table or explore selling through a short sale.If the value of your home has decreased since you bought it you might find yourself in a situation where you owe more, than what its worth. In cases if waiting for the market conditions to improve before selling is not feasible a short sale may be your option. In a sale you would need the banks approval to sell the house for less than your mortgage balance since they would be receiving less money than what is owed to them.
What happens to your mortgage when you purchase your home?
If you’re looking to buy a home before selling your one you’ll need to find creative ways to finance the down payment since your equity is tied up in your existing property. Here are an options to consider.
- Contingent sale; When searching for your home you can make offers with a contingency stating that the closing will only happen once your home sells. In a market sellers might not be as willing to accept contingent offers. If you manage to get one accepted you can secure the desired property while working on selling your current one.
- Bridge loan; A bridge loan is a solution that helps cover the payment, on your new home while waiting for the equity from your old home to become available. During this time you’ll have mortgage payments, on both properties. Also need to repay the bridge loan. It’s important to note that if it takes longer for your home to sell you could end up having two mortgages and a loan payment each month until it sells which can put financial strain on you.
- HELOC (Home Equity Line of Credit); A HELOC, which is a line of credit secured by the equity, in your home can serve as a solution to finance your down payment. It’s important to keep in mind that there are associated fees and obtaining a HELOC may not be possible if your house is already on the market.
What occurs with the escrow funds when you sell your house?
Escrow funds are money set aside during homeownership or the selling process to cover expenses. An escrow account is managed by a third party company to ensure that all parties receive their owed funds. There are two types of escrow accounts;
1. Mortgage lenders escrow account; This account is established by your mortgage lender to hold funds for real estate taxes, potential mortgage insurance and homeowners insurance. It is created at the time of home purchase. Remains open throughout your ownership so that your lender can handle recurring bills on your behalf.
2. Purchase and sale escrow account; This account is opened when you decide to sell and is managed by a third-party escrow agent. The agent holds all funds related to the transaction until closing including money from the buyer.
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