How much home equity you’ve built will directly impact how much cash (if any) you’ll walk away with when you sell your home. But what, exactly, is home equity? Why is it important? And how much equity should you build before you put your home on the market? Here are three important facts about equity that every buyer and seller should know:
1. What is home equity? Home equity is the difference between the market value of your home, and how much you currently owe on your mortgage. In other words, if you were to sell your home, it’s the amount of money you would have after paying off your mortgage.
2. Why is building equity in your home important? Equity is important because it determines how much money you will be left with after you sell your home and pay off your mortgage, and any sale related expenses. Home equity is also an asset; you can use it to finance other investments, or to make a down payment on a second home. It’s also a large source of many peoples’ overall net worth.
3. How much equity should you have in your home before you sell? While there’s no one-size-fits-all answer, ideally, you should aim to have at least 20 percent equity in your home before you sell. And while your equity can fluctuate based on a variety of factors — like market conditions, refinancing your loan and taking cash out against the equity, or opening a home equity line of credit — generally speaking, the longer you’re in your home, the more equity you’ll build, and the more you’ll potentially profit if and when you do sell.
