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When’s the right time to sell your home? Keep reading for some Dave Ramsey insight on your home equity and why it matters when you sell.
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If you are thinking about selling your home, you need to make sure you are really ready to move forward before you put your house on the market. One key factor is ensuring you have a sufficient amount of equity in the house.
Home equity is the amount of your house that you — not the bank — owns. It’s the value of your house minus what you owe on your mortgage loan. But, just how much of it do you need before you’re ready to move forward with selling?
Ramsey’s magic number for equity needed to sell a home
According to finance expert Dave Ramsey, you shouldn’t sell your house until you have enough equity to do two things:
Pay your current home mortgage in fullMake a 20% down payment to purchase a new property
Ramsey said it’s also helpful if you have enough equity left over to pay for other expenses associated with a sale, such as the costs of moving to a new place. This way, you wouldn’t need to pay out of your bank account for these additional expenses, which can total tens of thousands of dollars.
So, what would it mean to follow Ramsey’s advice? It depends on how much you currently owe and what you plan to do next. Say, for example, you have a $300,000 remaining mortgage loan balance and you plan to buy a new house priced at around $500,000. You’d need $300,000 for your existing mortgage plus another $100,000 for your next 20% down payment, for a total of $400,000.
Is Ramsey right?
Ramsey may be right, but a lot depends on your situation.
First and foremost, Ramsey said that it’s ideal if you can cover closing costs with the equity in your home. The reality is, if you don’t have enough equity to pay off your mortgage plus these costs, you have to come up with the cash elsewhere. That may mean finding a lot of money, which many people can’t do.
When you sell, you usually need to pay commission to your agent plus the buyer’s agent. That’s usually around 6.00% of your home sale total. So if you were selling a $500,000 house, you would need the profits to pay an additional $30,000 in commission. Other required closing costs could include title insurance, transfer taxes and fees, and prorated property tax, which can total thousands of dollars more.
You have to take all of this into account. If you don’t have the money saved to pay for these things and you don’t walk away with enough profit to cover them, you are not in a position to sell your home.
In the above example, you’d need that $300,000 already mentioned to pay off your mortgage balance plus another $30,000 in real estate commissions (assuming you’re selling a $500,000 home), plus another couple thousand in other required closing costs. So, you’d have to be able to sell for somewhere around $335,000 to $340,000 — not including the money you’d need for your next down payment
Now, you don’t necessarily have to make sure you can pay a down payment from your equity. You may want to rent for a while or move in with family to give you time to save up for your next home. But if you want to move into your next house right away, Ramsey’s advice is pretty good. Make sure your equity extends to make the down payment your new mortgage lender will require to give you an affordable new mortgage loan.
Do you have enough equity?
So, how do you know how much equity you have and if it’s enough?
You can get an idea of how much equity is in your home by first looking at online estimates of what your home is worth, checking out comparable sales in your neighborhood, or getting a valuation estimate from a local real estate agent. You could even opt to pay for a home appraisal if you want to find out what an expert thinks your home is worth.
Once you know how much your house is worth, add up your remaining mortgage balance, closing costs (including real estate commission) and any down payment money you need for your new home. Based on our above example, for instance, you’d need to sell your house for around $440,000 or so. If it was worth $500,000, you’d be in good shape.
RELATED: Mortgage Calculator
Be sure to go through this exercise to confirm you have sufficient equity before you move forward with a home sale. That way, you won’t be caught off guard by expenses you can’t pay, which could cause you a whole lot of financial stress before your move.
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