Today’s homebuyers may be facing rising prices and interest rates, but on the flip side, home sellers are making bank. CNBC reported that the average US mortgage holder has a record $185,000 in equity*. This is the “half glass full” perspective of today’s housing market.
The million-dollar question: Is it worth selling if you need a new place to live? You may be surprised how the numbers could work out.
A hypothetical for buying and selling in 2022
Hypothetically, let’s say a homeowner has a property that was purchased 5 years ago for $180,000. She sells it today for $400,000 and uses the net proceeds to buy a $600,000 home. Without additional monthly cost or a longer mortgage term, she upgrades to the new house, pays off $60,000 of other debt, and increases her net worth over $500,000.
Year | Property Value | Monthly Expense (all debt) |
Total Debt | Total Net Worth |
2022 | House1: $400,000 | $3,100 | $221,455 | $178,545 |
2022 | House2: $600,000 | $3,100 | $430,000 | $170,000 |
2031 | House1: $620,000 | $3,100 | $118,699 | $501,301 |
2031 | House2: $930,000 | $3,100 | $298,350 | $631,350 |
2043 | House1: $1.1M | $3,100 | $36,155 | $1.06M |
2043 | House2: $1.67M | $0 | $0 | $1.67M |
Let’s review how we got these numbers
A good estimate of a $180,000 30-year fixed FHA mortgage with 3.5% down and a 3.5% interest rate would be around $1,100**. That’s a great monthly payment for a home that’s now worth $400,000. For this reason, many homeowners are staying put.
However, if this homeowner sold that $400,000 house today, the total net proceeds could exceed $200,000.
$400,000 – sales price
-$28,000 – 7% cost to sell
-$180,000 – original purchase price
$192,000 – net gain
+$18,545 – estimated principal buy-down x5 years
$210,545 – total net proceeds from sale
Adding one more variable to this hypothetical, let’s suppose the homeowner owes $60,000 in other debt – two car loans and credit cards, with a $2,000 monthly obligation. That means her and her husband are paying a total of $3,100 a month between the mortgage and other debt.
$1,100 – monthly mortgage
+$2,000 – other debt
$3,100 – total monthly debt obligations
Now let’s suppose the desired new home is $600,000 and though this new house is worth $200,000 more than their current home, they do not want to increase their family’s monthly expenses or lifetime cost. They are also concerned about trading a 3.5% fixed-rate mortgage with a 5% loan.
The new mortgage without the monthly debt (it gets paid off with the proceeds of the sale) is roughly $2,500. With this large down payment and the payoff of other debt, the new monthly debt obligation is surprisingly $600 less even with the higher interest rate.
$600,000 – new home purchase
-$150,545 – down payment
$449,455 – new 30-year fixed-rate mortgage
x 5% – new interest rate
$2,500 – estimated monthly mortgage payment (principal and interest) **
If both homes appreciate at a rate of 5% a year (closer to the 48-year average), the annual equity gain on the $400,000 home would be $20,000. Whereas the $600,000 home would appreciate $30,000 the first year. This appreciation is compounded every year.
The downside to this scenario is they traded 25-years left on their previous loan for a new 30-year loan and a higher debt obligation. Not to mention, adding short-term debt (car and credit card) to a long-term loan.
The remedy: Take $500 a month from the monthly savings and pay it towards the principal of the new loan. This extra monthly payment would take an estimated 9 years off the mortgage, paying off the home and debt 4 years sooner than the previous mortgage (21 years vs 25 years).
The next 21 years could look like this considering a conservative 5% annual appreciation gain
Year | Property Value | Monthly Expense (all debt) |
Total Debt | Total Net Worth |
2022 | House1: $400,000 | $3,100 | $221,455 | $178,545 |
2022 | House2: $600,000 | $3,100 | $430,000 | $170,000 |
2031 | House1: $620,000 | $3,100 | $118,699 | $501,301 |
2031 | House2: $930,000 | $3,100 | $298,350 | $631,350 |
2043 | House1: $1.1M | $3,100 | $36,155 | $1.06M |
2043 | House2: $1.67M | $0 | $0 | $1.67M |
This hypothetical uses the following parameters
- All net proceeds from the sale of the first home were used as a down payment and to pay off $60,000 of other debt
- The other debt is paid off before the 2031 debt and net worth estimates on the first home
- The amortization (total debt) is calculated at 3.5% interest rate on the first home and 5% interest rate on the second
- Both homes appreciate at an annual average of 5%
- The extra $100 savings per month with the new loan is not calculated into the total net worth or monthly expense as a margin of error
Intercap Lending loan officers have the tools to take your current equity estimates and total debt and provide a similar report of your potential housing costs, net gain, and net worth over time. This can help you explore opportunities for debt consolidation, debt payoff, cash-out refinance, home upgrades, and property investing. Contact us today for a free consultation.
*CNBS (Feb 28, 2022) https://www.cnbc.com/2022/02/28/homeowners-hold-record-equity-what-to-know-if-you-want-to-borrow.html
**This is a hypothetical scenario and not intended to be an advertisement for a specific mortgage loan or commitment to lend. Other factors such as credit score, DTI, closing costs, taxes, and insurance will determine the actual costs of a mortgage. Please speak with your mortgage lender for home loan options and actual mortgage fees and costs.