home equity

The Benefits of Using Your Equity To Make a Bigger Down Payment

 
 

Did you know? Homeowners are often able to put more money down when they buy their next home.

That’s because, once they sell, they can use the equity they have in their current house toward their next down payment. And it’s why as home equity reaches a new height, the median down payment has too.

According to the latest data from Redfin, the typical down payment for U.S. homebuyers is $67,500—that’s nearly 15% more than last year, and the highest on record (see graph below):

 
 

Here’s why equity makes this possible. Over the past five years, home prices have increased significantly, which has led to a big boost in equity for current homeowners like you. When you sell your house and move, you can take the equity that gives you and apply it toward a larger down payment on your new home. That’s a major opportunity, especially if you’ve had concerns about affordability.

Now, it’s important to remember you don’t have to make a big down payment to buy your next home—there are loan programs that let you put as little as 3%, or even 0% down. But there’s a reason so many current homeowners are opting to put more money down. That’s because it comes with some serious perks.

Why a Bigger Down Payment Can Be a Game Changer

1. You’ll Borrow Less and Save More in the Long Run

When you use your equity to make a bigger down payment on your next home, you won’t have to borrow as much. And the less you borrow, the less you’ll pay in interest over the life of your loan. That’s money saved in your pocket for years to come.

2. You Could Get a Lower Mortgage Rate

Providing a larger down payment shows your lender you’re more financially stable and not a large credit risk. The more confident your lender is in your credit score and your ability to pay your loan, the lower the mortgage rate they’ll likely be willing to give you. And that amplifies your savings.

3. Your Monthly Payments Could Be Lower

A bigger down payment doesn’t just help you reduce how much you have to borrow—it also means your monthly mortgage payment may be smaller. That can make your next home more affordable and give you a bit more breathing room in your budget.

4. You Can Skip Private Mortgage Insurance (PMI)

If you can put down 20% or more, you can avoid Private Mortgage Insurance (PMI), which is an added cost many buyers have to pay if their down payment isn’t as large. Freddie Mac explains it like this:

“For homeowners who put less than 20% down, Private Mortgage Insurance or PMI is an added insurance policy for homeowners that protects the lender if you are unable to pay your mortgage. It is not the same thing as homeowner’s insurance. It’s a monthly fee, rolled into your mortgage payment, that’s required if you make a down payment less than 20%.”

Avoiding PMI means you’ll have one less expense to worry about each month, which is a nice bonus.

Bottom Line

Down payments are at a record high, largely because recent equity gains are putting homeowners in a position to put more money down.

If you’re thinking about selling your current house and moving, reach out to a trusted real estate agent. They’ll help you figure out how much home equity you have right now, and how it can boost your buying power in today’s market.

Read more at KeepingCurrentMatters.com

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Home equity remained near historic highs to end 2023

 
 

Buoyed by a rise in home prices, U.S. homeowners with mortgages saw their home equity increase by 8.6% year over year in fourth-quarter 2023.

Homeowners saw an average increase of slightly more than $24,000 compared to Q4 2022, adding up to a collective gain of $1.3 trillion, according to CoreLogic’s newest homeowner equity report. Net homeowner equity totaled more than $16.6 billion at the end of 2023.

“Rising home prices continue to fuel growing home equity, which, at $298,000 per average borrower, remained near historic highs at the end of 2023,” Selma Hepp, chief economist at CoreLogic, said in a statement.

“By extension, at 43%, the average loan-to-value ratio of U.S. borrowers has also remained in line with record lows, which suggests that the typical homeowner has notable home equity reserves that can be tapped if needed.”

 
 

Rhode Island posted the country’s highest annual equity gains of $62,000, followed by New Jersey ($55,000) and Massachusetts ($53,000). The equity growth in the three Northeast states was attributed to “the recent healthy home price increases” in that area of the country.

In January, home equity increased by 13.2% year over year in Rhode Island and by 11.6% in New Jersey, as the two states led the nation in annualized appreciation.

Texas was the only state that posted an annualized equity loss (-$6,000) in Q4 2023.

Home price growth over the past year helped lift the equity of homeowners who were underwater due to price declines in 2022, meaning their mortgage debt exceeded the value of their properties. 

As of fourth-quarter 2023, the total number of mortgaged homes with negative equity decreased by 1.1% from the previous quarter to 1 million homes, or 1.8% of all mortgaged properties.

Compared to 12 months earlier, that figure dropped by 15%, from 1.2 million homes or 2.1% of all mortgaged properties. 

The national aggregate value of negative equity was approximately $323 billion at the end of last year. This was up by $9 billion (3%) from the $314 billion figure in third-quarter 2023 but down by $12.4 billion (4%) from the $336 billion total in fourth-quarter 2022.

 
 

Because home equity is affected by home prices, borrowers with equity positions near the break-even point are most likely to move into or out of underwater status as prices change. 

If home prices increased by 5%, 114,000 properties would have regained positive equity status as of Q4 2023. If prices declined by 5%, however, 162,000 homes would have fallen underwater, CoreLogic projected. 

The real estate analytics company expects U.S. home prices to increase by 2.8% from December 2023 to December 2024.

Read more at HousingWire.com

Related Links

If there is a home that you would like more information about, if you are considering selling a property, or if you have questions about the housing market in your neighborhood, please reach out. We’re here to help.

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Search Homes in Oregon

Search homes in Minnesota