Do You Get Equity When You Sell Your Home?
Understand home equity: what it is, how it grows, and the financial proceeds you can expect when you sell your property.
When you sell your home, the concept of home equity becomes central to understanding the financial outcome. Home equity is the portion of your property you genuinely own, free from debt. It represents the financial interest built over time, and it is realized as cash when you complete a sale.
What is Home Equity?
Home equity is the difference between your home’s current market value and the total amount you still owe on any loans secured by the property, such as your mortgage. It is essentially the unencumbered value of your real estate. For instance, if your home is valued at $400,000 and your outstanding mortgage balance is $250,000, your equity is $150,000.
This calculation means that any down payment made when purchasing the home immediately contributes to your initial equity. As time progresses, this owned portion can change based on various factors.
How Home Equity Grows
Home equity increases through two primary mechanisms: regular mortgage payments and the appreciation of your home’s market value. Each mortgage payment consists of both principal and interest. The portion applied to the principal directly reduces your outstanding loan balance, increasing your ownership stake.
Beyond paying down your loan, the market value of your home can rise due to general market conditions, local economic growth, or improvements you make to the property. As your home’s value appreciates, your equity grows even if your mortgage balance remains constant. This combination of debt reduction and value increase builds your financial interest.
Receiving Your Home Equity When You Sell
When you sell your home, your accumulated equity converts into cash proceeds. The sale price is the starting point for this calculation. From this amount, your outstanding mortgage balance, including any home equity loans, is paid off first.
After the mortgage is satisfied, various selling costs are deducted from the remaining funds. These include real estate agent commissions, which range from 5% to 6% of the sale price. Other expenses, known as closing costs, may encompass transfer taxes, title insurance fees, escrow fees, and attorney fees, totaling an additional 2% to 4% of the sale price.
The amount left after all these deductions is the net equity you receive at closing. This can be expressed as: Sale Price – Mortgage Payoff – Selling Costs = Net Proceeds. Capital gains from the sale of a primary residence may be excluded from taxable income up to $250,000 for single filers and $500,000 for married filing jointly, provided certain ownership and use tests are met.