There’s no absolute correct answer for knowing how much home equity a homeowner needs to have saved before selling their home. The answer depends on how much cash you want after the transaction is completed as well as what you plan to do with the funds. A good rule of thumb is to have at least 10% equity to cover the closing costs associated with the sale. Anything more will be excess cash that will be deposited into your bank account once the home sale is finalized. That cash can then be used for your other needs, such as moving expenses, paying off debt, or a down payment on another home.
With that said, how much equity you should have will vary depending on your financial circumstances. Read on as we’ll explain how your home equity can affect the sale of your home.
How is home equity calculated?
To calculate your home equity, you can take the market value of your home minus your mortgage balance and other liens against the property. For example, a home with a value of $610,000 and $250,000 in mortgage loans would give you $360,000 in home equity.
Assuming there are no expenses associated with selling the home, that $360,000 is the amount that would be deposited into your bank account upon the close of escrow. However, selling a home is a complex process that involves a number of third-party companies you’ll need to pay for.
How does home equity help me when I sell my property?
You don’t get to keep all the money when you sell a home. Some of it will be used to pay things like your mortgage loan, and how much equity you have will determine whether you’ll need to write a check in order to finalize the sale. Having more equity also means you can get more funds deposited to your bank account after the close of escrow.
In other words, you’ll have more funds to use for other purposes, such as the down payment for another home, moving expenses, and more.
How much does it cost to sell a home?
In general, the closing costs involved in the selling process will be around 10% of the sales price. Sales costs can include a variety of items, such as real estate agent commissions, repairs, and allocations for capital gains tax. Here is a list of common expenses you can expect to pay as a seller:
Real estate commissions
This is a fee you can negotiate when you hire a real estate agent, but typically runs around 6% of your home’s sale price. This fee covers the services offered by your agent, such as staging the home, researching your home’s market value, processing the necessary paperwork, and finding a buyer.
This can vary depending on where you are located, but generally costs around 0.5% of your home’s selling price. While you might be able to negotiate for the buyer to pay for this, it is customary in many areas for the seller to pay for the owner’s title insurance policy that will protect the new owner against any errors, omissions, or other defects pertaining to legal ownership of the property.
Fees can range between $1,000 and $3,000 and cover a variety of services such as the preparation of paperwork and ensuring that funds are released in adherence to the agreed-upon conditions by all parties.
County transfer taxes
This is another expense that can vary by location, but is typically between $0 and $2,000. Transfer taxes are charged by specific counties to process the paperwork involved with a change of ownership.
Prorated fees or assessments
Consider any semi-annual or annual fees you pay, such as property taxes or homeowner’s association dues. You may be responsible for a portion of these fees if you have not yet paid them upon the close of escrow.
Association processing fees
It is common for homeowner’s associations to charge certain fees to facilitate the paperwork to satisfy legal and compliance items involved with a change of ownership. Some examples can include providing the new owner with a copy of the bylaws and CC&R’s. If the buyer requests for the seller to pay for these fees, it can range from $0 to $200.
Mortgage loan payoff demand and recording fees
This fee typically ranges between $200 and $400. You’ll have to satisfy your mortgage balance to sell the house, and your mortgage lender will charge a demand fee to determine the final amount due to them as part of the sale. This can include a final mortgage payment consisting of your principal balance, mortgage interest, and government recording fees.
Do I need equity to sell my house?
Having equity is not a requirement to sell your home. However, it can affect your ability to do so. If you don’t have enough equity to cover the costs associated with the sale, you’d need to cover the difference out of your own pocket. This can typically be from your checking, savings, or investment accounts.
If you don’t have enough funds, you would not be able to complete the sale of the home. If you find yourself in this situation, you could consider getting a loan from a bank or borrowing money from friends or family.
The more equity you have, the more cash you’ll be able to use once the sale is finalized. Depending on your circumstances and financial goals, you can use these funds for a variety of things, including the down payment on a new home, moving expenses, debt consolidation, and more.
How can I build equity in my home?
While some things are out of your control, such as the selling price of your property based on the state of the housing market, there are a few things you can do to build equity and prepare your house before selling it:
Complete necessary repairs
This step can help improve your home value because it reduces the number of expenses that potential buyers may incur if they wish to purchase your home.
Conduct home improvements
If you are considering renovations or other home improvements to increase your property’s market value, you may want to consult a real estate agent to get the most return on investment.
Tidy up the home
The cleanliness of a home can impact a potential buyer’s perception of what the home is worth. If buyers can easily see themselves living in the home, they may be inclined to give you a stronger offer.
Complete regular maintenance
Being able to provide proof that you have regularly or recently had your home inspected and the necessary maintenance completed can give buyers reassurance that they should not have any unexpected repairs once they take possession of the home.
Frequently Asked Questions (FAQs)
Here are a handful of common questions home sellers have about their home equity.
How much equity does the average person have?
According to Investopedia, the average homeowner had about $185,000 in home equity in 2022. If you’re like most Americans, that bodes well for you because it means you should end up with cash in your pocket upon the sale of your home. However, this can vary based on where you’re located and how much you owe on your home.
How long should I own my home before selling?
In general, it’s recommended that you live in your home for at least 5 to 7 years. This is to ensure that you have enough time to recoup the costs paid for acquiring the home, as well as cover the expenses you’ll incur in selling the property. The longer you stay in the home, the more likely you’ll have enough equity to at least cover closing costs when you sell the home.
Should I tap into my home equity before selling the property?
The short answer here is that it depends. If you need funds to get your home ready to sell, then it may make sense to do this. Otherwise, you won’t be losing out on anything because any excess equity you have in the property will be deposited into your bank account upon the close of escrow. You can read our guide on how to take equity out of your home.
How much home equity should I have before selling?
If you’re thinking about selling your home, having at least 10% equity should be enough to cover all of the closing costs. There’s no requirement for how much equity you need to have, but if you don’t have enough to cover the sales costs, you’ll need to pay out of your own pocket or get a loan. Any equity left over after all of the fees have been paid will be deposited into your bank account which can then be used for things like a down payment for a new home.