Understanding Equity and Seller’s Net
Equity is the difference between the market value of your home (what you can sell it for) and what you owe on it. If you owe nothing on your home, your equity is the current market value. Most home sellers borrowed money to purchase their home, and still owe their lender a sizeable portion of what they borrowed. When selling it is important to know how much equity you have.
Factors that Affect Equity
Down Payment: With 10% down on a $200,000 home, your beginning equity will be $20,000.
Appreciation: the increase in the market value of your home over time. If your $200,000 home is worth $240,000 after 5 years, your equity has grown by $40,000.
In some markets, properties depreciate, or lose value. In this situation, your equity will decrease.
The condition of your home affects its market value. A home in poor condition will not get top dollar on the market.
Loan Pay-down: A monthly mortgage (loan) payment typically has several parts: interest on the loan, taxes, hazard insurance, private mortgage insurance (required with less than 20% down to protect your lender against default) and loan pay-off (portion applied to the loan principal or amount borrowed). Example: You borrow $180,000 at 6% interest for 30 years. At the end of 5 years, you will owe $167,500, and will have paid off $12,500 of what you borrowed.
Summary of equity in the example above:
Down Payment = $20,000
Market Value = $240,000
Appreciation = $40,000
Amount Owed = $167,500
Paid on Loan = $12,500
Equity = $72,500
Equity = $72,500
Determining Market Value
A Comparative Market Analysis (CMA) will show you the market activity for comparable homes near your home for the previous 6 months (typically). A CMA will help you to decide the market value of your home. Your Realtor® should prepare a CMA for you.
Costs of Selling Your Home that Affect Your "Net" from Selling (Your Bottom Line)
There are costs associated with selling a property. The following table of typical seller closing costs is based on a new conventional loan for the buyer and a sales price of $240,000. (With other types of Buyer loans and as agreed to in the contract there may be other settlement costs.) Your net from selling will be your equity less all your closing costs. Loan payoff is included below since the payoff of your loans is taken care of by the title company at closing.
Typical Seller Closing Costs (Listed alphabetically)
|Attorney fee (document preparation and document review)|
|City of Austin Energy Audit (required after 6/1/09)||$200-$250|
|Commission (negotiable with listing agent, typically 6% of sales price)|
|Courier/messenger fee (document delivery)|
|Escrow fee (set by title company for handling the escrow and closing)|
|Home owner association documents (required by contract)|
|Home owner association fee (prorated per monthly or other collection schedule set by HOA or HOA mgmt. company)|
Varies with HOA
|HOA transfer fee (set by HOA or HOA mgmt. co.) |
|Home warranty for Buyer (see contract; insurance policy for repair of covered items)|
|Loan payoff (principle balance + interest through payoff date) |
|Loan prepayment penalty (depends on loan agreement) |
|Recording fee (cost to put sales documents in the public record)|
|Repairs (costs of any repairs negotiated with the buyer; completed and paid for by Seller to prior closing; if cash is agreedto, paid at closing) |
|Seller-paid Buyer closing costs (as agreed to in contract)|
|Survey (if required and per contract) |
|Tax certificate (shows taxes for current year and any delinquencies) |
|Taxes (prorated from Jan. 1 through the day of closing; funds escrowed for taxes/ins. by your lender are refundable to you after closing)|
|Title insurance (rates set by TX Board of Insurance; which party pays for the owner title insurance is negotiable in contract; typically paid by seller) |