If you’re looking to sell your house, you might be looking forward to a generous payday. But how do you predict the amount of cash you can expect to receive? This is where the magic formula of Home Equity comes into play. How is it different to your home valuation and why is this figure even more important?
What is home equity?
Home equity is simply the portion of your home that you actually own. It can be calculated by taking the current market value of the property and subtracting the remaining mortgage balance.
The higher your home value and the lower your mortgage balance, the higher your home equity value. For example:
$500,000 (current property value) – $200,000 (remaining loan balance) = $300,000 (Your Home Equity)
This equity value is the true amount of the house that you actually own as the remaining mortgage will have to be paid off before you own 100% of the house you live in. This equity value is considered your asset and not the full value of your home.
Now that you understand home equity – here’s where it gets tricky.
It’s easy to get this number wrong
A lot of people get started on the wrong foot. The common mistake made is having the original purchase price of your home as the main number.
If you have bought your home even just 3 years ago, the value of your home can quickly change especially in this market.
We’ve seen property prices jump almost 10% year on year and many are sitting on hundreds of thousands of dollars in additional equity just because the value of their home has shifted from the day they bought it.
So where do you get the right valuation of your home to calculate your home equity accurately? We have built the best tool for you in-house.
Ohmyhome’s e-Valuation service can help you get started on getting an accurate valuation. It’s completely free and there are a few key advantages:
- Low error percentage: Ohmyhome’s e-Valuation has historically shown a median error rate of only 5% throughout all our valuations
- Up to date and accurate: The algorithms are constantly updated and trained with current market prices to make sure it accurately represents the trends
- Based on reliable data: The data used is mainly transactional data from reliable public and private sources.
Once you have a rough ballpark figure of how much your home is worth, then you can start making plans on what you’re going to do with your home equity.
Why does home equity matter and why is it more important?
Home equity matters when you’re selling your house and planning to buy a new one with the proceeds. And if you only refer to your home valuation and not home equity, you will falsely believe you have more resources on hand than you thought.
You might be overestimating the financial power you have to be able to afford the value of the new home you are looking to buy. It’s likely you may be forced to fork up additional cash to cover this shortfall.
For example, if we use the same example of you owning a $500,000 home. Let’s also add that you currently have $100,000 in savings set aside as well as received notification that you can borrow another $1,000,000 from the bank, you may think you can safely own a $1.6m home. $500k + $100k + $1m.
But because you still have a $200,000 outstanding mortgage and thus only $300,000 equity, you can actually only comfortably own a $1.4m home.
In this scenario, you’re not going to have enough resources to buy your dream place and may even change your mind about selling because you realize you can’t get what you wanted. And you might actually be too late to reverse the process if you’re midway into completing the sale of your home.
This is why it’s crucial to have someone walk you through the process; financial calculation is both an art and science that our experienced Ohmyhome agents have mastered.
You’ll be in good hands as you’re guided through every step of the way. Simply. They’ll ensure you understand the amount of equity you own – and an accurate idea of the proceeds that make its way to your pocket by the end of a sale.
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You can contact us via our Live Chat, Whatsapp, or fill up this form, and book a free consultation with our knowledgeable and experienced in-house agents who have a track record of transacting more than 60 homes every year.