Why You Need Home Equity to List Your Home for Sale

Selling your home for more than you owe on the mortgage gives you the benefit of positive equity and getting cash back at closing. The ideal time to sell is when you know you’re making a profit. The amount of home equity you have in your home depends on a few variables and should be taken into consideration when deciding to sell your home.

What is home equity?

Home equity is the difference between what you owe on your mortgage and what your home is currently worth. Here’s an example: Let’s say you owe $150,000 on your mortgage loan and your home is worth $200,000, that would give you $50,000 in equity on your home. It's as simple as that!

Any gain in home equity comes from either paying down the principal balance on your mortgage loan, an increase in the market value over time, or improvements made to your house. Gains in home equity happen over time, not overnight!

What if I have negative equity?

Having negative equity doesn't equate to a financial apocalypse. While things may not have gone the way that you had planned when you first purchased your home, you can still get back on track or at least lessen the burden. If the negative equity comes from a drop in the market, you can continue to make monthly payments as normal and know that the market will eventually go back up. 

Being upside down on a mortgage does not have to prevent you from selling your home. However, you will need to pay the difference between the sale price and the remaining balance of your loan. If your home sells for $200,000 and you owe $225,000 on your loan, you'll need to pay the lender that $25,000.

How can I increase my equity?

If you're able to make extra payments on your loan, in addition to your normal mortgage payment, you will be able to choose to have those extra payments be applied to the principal balance only. This will lower your balance and increase your equity faster. 

A simple way to do that is to make one extra full payment once a year. This can be achieved by making bi-weekly payments on your mortgage (paying half the monthly amount every two weeks) and at the end of the year, you will have made one extra full payment- that’s 13 payments instead of 12 payments!

Alternatively, if you aren’t able to make extra payments, something else that homeowners can do is rent out a single room in their home or move into a smaller, more affordable space and rent out their entire home if they can’t sell it. 

Finally, one proven way to raise the value of your home is to make improvements. You can renovate your kitchen or your bathroom, upgrade old appliances, and improve the overall curb appeal of your home. 

As you can imagine, it is in your best interest to build up as much home equity as you are able to before you decide to sell your home. That way you don’t have to bring any cash to the closing table!