20% Equity In Your Home: What It Means If You Have It

22Apr2013
Author:
Scott Sheldon
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20% Equity In Your Home: What It Means If You Have It

The housing market has certainly changed in the last six months. Many people who otherwise thought they did not have 20% equity actually do have 20% equity as the  low supply of homes available in the market against the amount of determined buyers continues to drive home sales up. The newly fueled appetite for real estate is creating a sellers’ market, people are now coming out of the woodwork to sell their homes by virtue of amassed equity.

Some important terms to become familiar with

Equity: defined as the amount in dollars between the current loan amount and appraised value. Example- a loan amount of $300,000 and its equity relationship to the valuation of $320,000 translates to $20,000 in equity (same as cash value for our purposes)

Loan-to-value: LTV for short -is the amount of loan against the value of the property. Using the same figures, a loan amount of $300,00/$320,000 translates to a loan to value of 93.8%.

What 20% equity in your home actually means

It means you have choices, choices with how you hold,  encumber or use that property moving forward.

Following market advantages with 20% equity:

  • Refinance- re-mortgage your home out of monthly mortgage insurance. If you presently have an FHA Insured Loan that you took out in the last couple of years, or even a Conventional Loan with monthly mortgage insurance, talk to a mortgage lender immediately.  Average refinance savings is $300 per month.* Remember mortgage insurance benefits the lender, not the consumer. Ancillary benefit is a likely to be lower interest rate, anyway.
  • Selling your home-need a larger down payment to buy the long term home? You can net the down payment from the sale of your current home for use on the new home you upgrade to. Of course realtor commissions are 6% from the net proceeds, so your net for the down payment is after commissions and applicable transfer taxes.
  • Refi/Renting Out The Home For-as a rents are up in most markets, positively cash flowing your property by virtue of a lower payment (potential refinance). By refinancing out of mortgage insurance, net cash flow and subsequent net income improves.
  • House To Offset New Mortgage Payment- more equity in your current home you plan to rent out can be more easily accomplished having 20% or more equity in your home for the purposes of using fair market rents to offset the mortgage payment. Granted in such a scenario you’ll need at least 30% equity to convert your primary home into a rental for the purposes of offsetting the payment, but you’re a lot closer there given that you may already be at 20% equity.

How to determine whether or not you have 20% equity in your home for lending purposes.

You do you have a few options here, that boil down to have a conversation with a sharp loan professional. Your mortgage lender, should be able to check the local county records to see what properties in and around your area have closed within a half a mile proximity to your home. Additionally, lenders have access to an automated valuation model, an algorithm for properties in and around your area which derives a value. Some lenders like bigger banks heavily rely on such data to determine equity in their performing loan portfolios. The same data can be used by your loan officer to determine equity in your home for the purposes of running refinance scenarios or using equity to offset the payment in a purchase situation. Some lenders might charge for this service but, but you can easily negotiate this fee to be waived. The last option, assuming you can qualify for financing with credit, debt, income, and assets is to shell out funds for an appraisal. Doing so is by far the most accurate way to determine how much equity you have.
 Because home sales are up in most markets, getting qualified with a lender and ordering a subsequent appraisal is the smartest approach despite the risk. In most cases, the risk of losing $450 for an appraisal (average cost for an appraisal), for the gain of saving several hundred dollars per month, or being able to purchase the property otherwise thought not possible, can usually be justified. You’ll want to make that determination for yourself as an informed consumer.
Start exploring your scenarios today by getting a complementary mortgage rate quote for your home.

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