Whether your family is welcoming new additions making for a larger household or your current living space doesn’t have the room you desire to entertain others and fit everything you need, buying a larger home is a process and making the decision to upsize takes a lot of factors into consideration.
Current homeowners looking to purchase a larger home can do so by utilizing their home equity. What is home equity? How can you increase it? Check out these answers to some common questions to determine if purchasing a larger home is right for you and your family.
What is home equity?
Simply put, home equity is a homeowner’s financial interest in a home that can increase over time. Home equity typically starts when a mortgage is made out on a home and homeowners begin to make monthly payments. For example, if a home is $200,000 dollars and the owners purchased it at full value with a 20 percent down payment and a loan from the bank for the remaining amount, they have 20 percent of the purchase price or $40,000 that they own. Depending on the worth of the house as well as the down payment, home equity can be used towards the purchase of another home. In a 2019 Q3 U.S. Home Equity and Underwater Report conducted by ATTOM Data Solutions, 14.4 million residential properties in the United States were considered equity rich, meaning that the combined estimated amount of loans secured by those properties was 50% or less of their estimated market value. In other terms, these homeowners have at least 50% equity can use it towards the purchase of a new home.
How can you increase your home equity for a larger home purchase?
Over time, there are several ways to increase your home equity so in the long run it can help you with the purchase of a larger home. The first method is loan repayment. When you pay down the balance on the loan you took out for the purchase of your home, try to aim higher than the minimum monthly payment. This will make the overall amount decrease quicker and that extra amount will cover the interest and principal on the loan. Additionally, when you buy that first home knowing that a larger home might be in your future, make a larger down payment. A bigger down payment results in less of a loan having to be taken out.
You can also build home equity by not doing much work. If the real estate market is thriving, so is your home equity. Also making simple improvements to your home like landscaping services, new siding or finally renovating that master bedroom can do wonders to the worth and equity of your home when you look to sell it for a larger one.
I’m ready to use my home equity. What do I do first?
Once you find that larger dream home and you are ready to use your current home equity, you can utilize it in several ways.
Use the amount of your equity: If you sell your current home, you can take your current equity and apply that towards the purchase of your second home. There is however, one stipulation. If you still have any outstanding mortgage balances, you will not receive all the money from your buyer but your equity will remain safe and yours.
Use a home equity loan: A home equity loan aka a second mortgage can be used towards the purchase of a second home or for any expenses related to it. Real estate professionals,however, will warn against doing this as there are several risks and saving the money for another long-term investment like retirement.
If you are looking to use your home equity but unsure where to start, contact the real estate professionals at NJ Lenders Corp. Right in New Jersey, NJ Lenders Corp. help homeowners make the right decisions so they have a successful future.