How To Use Equity To Find A Bigger Home

November 2, 2023

Homeowner Housing Market Seller

Are you dreaming of a bigger home? 🏡

Have you and your family been feeling cramped in your current home?

Perhaps you’ve been dreaming of:

an extra bedroom?
a larger yard?
your very own home office where you can close the door to all the distractions and finally, truly, focus?

If you’ve owned your current home for more than a few years you might actually already have the ticket to your dream home tucked away in your current one.

In the South Jersey real estate market, we’ve seen incredible home price appreciation — especially since 2020 — which means homeowner equity has flown 🕊️

Let’s delve into how you can use your home’s equity to land the home you really want:

What is equity?

As a mathematical equation…

Your home equity = your home’s current market value - your remaining mortgage balance

It’s like the best piggy bank you’ll ever own; as your property appreciates (and you keep paying off your mortgage) you accumulate equity 💰

why use your equity to buy your next home?

If you’re wanting to move from your current home onto your next, here’s some reasons why you should put your accrued equity to use:

It’s “free money”. At the least, the portion of equity you’ve accrued via home price appreciation (i.e. the amount you haven’t contributed to) is essentially “free money”. It’s equity you’ve gained simply by the housing market being awesome.
Downpayment boost: The equity can make for a substantial downpayment on the next home, reducing your monthly bills.

“The average homeowner gained around $33,400 in home equity between Q2 2020 and Q2 2021. That’s a huge chunk of a downpayment.”
CoreLogic

So there’s plenty of opportunity in your home’s equity!

how to access equity

There are several ways you can access the equity in your property:

Home Equity Loan: This is essentially a second mortgage at a fixed rate. It works great if you have a specific amount in mind for your next home's downpayment.
Home Equity Line of Credit (HELOC): A credit line using your home as collateral. This method offers more flexibility — think of it like a credit card., and you can borrow as needed during the "draw period”.
Cash-Out Refinance: Replacing your existing mortgage with a larger one and pocketing the difference.

There’s a lot to know about using the equity in your home to move onto the next, so be sure to read:

📮 RELATED POST: WHAT CAN YOU DO WITH YOUR HOME EQUITY

There are pros and cons to accessing your home’s equity and the way in which you go about it.

You’ll want to discuss all of these options with a trusted, well-reviewed real estate agent and mortgage lender.

Case Study 👱‍♀️🔍

Let’s take a look at an example of how a homeowner moved house by using equity to make that process more seamless:

Sadie bought her condo in Marlton, New Jersey, about six years ago for $180,000.

Over the years, Sadie has paid off around $30,000 of her mortgage — go Sadie! 🥳🔥

And — the best part — due to the competitive nature of the real estate market locally, the property is now valued at, incredibly, about $330,000! 📈✨

How did Sadie arrive at this valuation? She reached out to a local real estate agent with 5⭐️ reviews and a crazy-educational social media presence. The agent ran the “comps” (comparing Sadie’s condo to similar-sized condos that sold within the last few months) and arrived at an estimated valuation of $330,000.

Sadie got married earlier in the year and had plans to settle down with her partner and have kids. They decided it was time to sell the condo and move into a single family home that had 3 or 4 bedrooms.

With no savings (Sadie funnelled all her extra cash into paying off her mortgage) she knew she couldn’t buy non-contingent.

📮 RELATED POST: WHAT THOSE CONTINGENCIES MEAN WHEN BUYING A HOUSE

However, due to the competitive nature of buying in South Jersey, Sadie’s realtor informed her that contingent-on-sale offers have a lower chance of being accepted.

After running through her options with a mortgage lender, Sadie decides opening a Home Equity Line of Credit (or HELOC) is the right choice for her, to help fund her next property (with a non-contingent offer!) using the equity she’s accrued.

Sadie strategizes with her agent about her ideal home. They discuss the amount she’ll likely need for:

✅ the downpayment on that home

✅ the closing costs for the transaction

They decide $50,000 should cover everything she needs, and her agent links her with an incredible mortgage lender who establishes the HELOC for this amount.

The HELOC takes a few weeks to get set up, and since Sadie doesn’t yet know when she will move, this new line of credit gives her flexibility to jump on the right property when it comes on the market.

Using Equity To Upsize — Step By Step

Now let’s go over all the steps you’d take:

Step 1: Determine Your Equity

Get a Professional Valuation: Start with an appraisal or a comparative market analysis from a real estate agent to know your home’s current value.
Calculate Your Equity: Subtract your mortgage balance from the current market value of your home to figure out your equity.

Step 2: Explore Financing Options

Consult Financial Experts: Speak with a mortgage lender to understand which equity-tapping option best suits your needs.
Choose Your Loan Type: Decide between a Home Equity Loan, HELOC, Cash-Out Refinance, or Bridge Loan based on your financial strategy.

Step 3: Get Pre-Approved

Gather Documentation: You'll need financial documents, like W2s, tax returns, and pay stubs for loan approval.
Pre-Approval: Apply for pre-approval to understand how much you can borrow and present yourself as a serious buyer.

Step 4: Plan Your Purchase and Sale

If your plan is to put in an offer on your new home, and either get under contract or close, before even putting your existing home on the market, you need work with your real estate agent to start househunting. Your agent should set you up with property alerts, take you to view homes, and strategize with you over what offers you should be putting in.

📮 RELATED POST: HOW TO FIND A REALTOR IN SOUTH JERSEY

Step 5: Put Your Current Home on the Market

List Your Home: With the help of your real estate agent, list your home to get the best possible offer.
Spend some time cleaning and decluttering your property so that it looks best in the professional photos and for showings. If you’ve already moved out of the property, considering hiring a staging company to fill your home with beautiful furniture and decor, to really make it shine.

Step 6: Close on Your New Home

Finalize the Financing: Work with your lender to finalize the loan, using your equity as planned.
Close the Deal: Complete the home-buying process by closing on the new home, which may involve using funds from your equity loan as a downpayment.

Step 7: Move In and Settle Your Loans

Coordinate Your Move: Plan the move to your new home. You might want to hiring professional movers, at moving trucks to DIY. Consider hiring a professional cleaner after you vacate, as you’ll be expected to leave your property 'broom clean’ for your buyers.
Adjust Your Finances: If you used a Bridge Loan, pay it off with the proceeds from your sale. If you chose a different equity loan type, start your new repayment schedule.

Step 8: Enjoy Your New Home

Relax and Unpack: You’ve successfully upsized! Now it's time to enjoy the additional space and comforts of your new home.

Using equity to buy a new home can be a great financial move, but it’s important to proceed carefully and consider the risks and benefits of tapping into your home’s value.

Always seek advice from real estate and financial professionals to guide you through this process.