Originally published 6/11/2019

How come I’m not making any money on my home sale?

Sometimes, home sellers net less than they had hoped and, in some cases, we hear “everyone is making money off of this deal except me!” What happened? The two factors that determine your check at closing are the value of your home and how much equity you have in it.

Value of your home is determined by condition, location and the market. The only one in your immediate control is condition. The better the condition of your home, the higher the price you can command in a given market. You can either maintain and improve condition over time or you can do it immediately prior to the sale. Price is determined by the market (ie your buyer). At any given time, it is either increasing or decreasing. If the value of your home has increased over the last 5 years, then your equity has also increased. If the value of your home suddenly decreased, then your equity also decreased. The good news is that over the last 10 years, there has been a yearly average increase of 4%.

However, the market value of your home doesn’t determine how much you will net in your sale. Equity, the value of a property minus all associated debts, will determine the size of your check at the closing table. How is your home’s equity either increased or decreased?

DOWN PAYMENT The more you put down on your home, the more equity you own in your home.
MORTGAGE PAYMENTS Mortgage payments (excluding taxes and insurance) consist of two portions: interest (this is the money you pay the bank for letting you borrow their money) and principal (this is the amount of equity you purchase each month). Don’t skip these payments or you will lose equity.
ADDITIONAL PRINCIPAL PAYMENTS You can accelerate your equity by paying extra each month towards principal (make sure the extra goes here). On a $200,000 loan at 5%, paying $25 extra each month pays off the loan 18 months early and reduces your total interest paid to over $11,000.
LENGTH OF LOAN While most mortgages are 30 year terms, you can choose a shorter term loan. Purchasing a 15 year loan pays off the mortgage in half the time which increases your equity 2x as fast. Another great benefit is that total interest paid decreases substantially.
HOME EQUITY LOANS OR REFINANCING These are often used as a quick way to get cash for unexpected bills, college expenses or home improvements. However, this cash out is directly against your equity in the home. It is equivalent to raiding your piggy bank or savings and sometimes it makes perfect sense to do so. However, remember to consider your own timeline (will you be moving before equity is built back up) and your financial situation.