How Your Home Equity Makes Buying a New Home Possible

How Your Home Equity Makes Buying a New Home PossibleIn a real estate market characterized by rising prices and higher interest rates, leveraging your current home equity can be a game-changer. It increases your purchasing power, provides financial flexibility, and helps you secure favorable loan terms, making it possible to buy the home you desire.

Understanding Home Equity

Home equity is the difference between the current market value of your home and the outstanding balance on your mortgage. For example, if your home is valued at $500,000 and you owe $200,000 on your mortgage, you have $300,000 in home equity. Over time, as you make mortgage payments and as your property appreciates in value, your equity increases.

How does equity help me buy my next home?

Having home equity comes with many benefits that can make buying your next home easier. 

1. Increased Purchasing Power: One of the most significant benefits of leveraging home equity is the increased purchasing power it provides. By tapping into your equity, you can make a substantial down payment on your new home. A larger down payment reduces the loan amount you need, potentially lowering your monthly mortgage payments and offsetting the higher interest rates to make the numbers work.

2. Access to Better Loan Terms: Using your home equity can help you secure better loan terms. Lenders often view buyers who make substantial down payments more favorably, which can result in lower interest rates and better mortgage terms, even in a higher rate environment.

3. Avoiding Private Mortgage Insurance (PMI): By using your home equity to make a down payment of 20% or more on your new home, you can avoid the additional cost of private mortgage insurance (PMI). PMI is typically required for borrowers with down payments less than 20% and can add significant costs to your monthly mortgage payment.

4. Financial Flexibility: Leveraging home equity can provide financial flexibility. It can free up your cash reserves for other investments, home improvements, or emergency funds, ensuring that you have the liquidity to handle unforeseen expenses.

Strategies to Offset Higher Interest Rates

We know that interest rates are one of the most influential factors in whether you can afford to buy a new home. While there is only so much you can do about interest rates, there are some strategies you can use to offset the impact of these increased rates.

Consider whether any of these strategies might work for you:

  • Rate buydown: Consider negotiating a rate buydown with your lender. By paying points upfront, you can lower your mortgage interest rate. This upfront cost can be covered using your home equity, leading to lower monthly payments over the life of the loan.
  • ARM: An adjustable-rate mortgage (ARM) offers a lower initial interest rate compared to fixed-rate mortgages. This can be advantageous if you plan to sell or refinance before the rate adjusts. There is an element of risk to this move, but you can talk with your lender to see if it's right for you.
  • Shorter loan terms: Opting for a shorter loan term, such as a 15-year mortgage instead of a 30-year mortgage, can result in lower interest rates. Although monthly payments are higher, the total interest paid over the life of the loan is significantly reduced. If you have the flexibility in your monthly budget, this might work for you. 

Remember that if you are already a homeowner, you likely have a significant enough amount of equity to work in your favour. We know that upgrading your home can be daunting, but it doesn't have to be. 

"Leveraging your home equity can make buying a new home much more affordable, even in a high-interest rate environment. By using the equity you've built up, you can significantly increase your down payment, lower your loan amount, and potentially secure better mortgage terms, making your dream home within reach. One thing I've learned after years in real estate is to never assume whether you can afford your ideal property; get the real numbers and you might be surprised." --Ben Burks, the Burks Team

Ready to find your new home in Oakville or learn more about the current value of your home? Contact us any time.

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