Three reasons why knowing how much money is in your home is important to your financial health
If you are anything like me, you are keenly remember how much your downpayment was, having sweated and saved for it, watching every penny.
And, you know that your downpayment is “in your home” and that you’ll likely get it back when you sell your home someday.
And, there’s another chunk of money in your home – it’s from the part of your mortgage payment called the principal payment.
Every month, part of your mortgage payment – the “principal payment” – goes to paying down your loan, and part of your payment is just interest – the “interest payment“. Each principal payment reduces your remaining loan amount – the amount you owe to the bank. When you sell your house, these payments that pay down your loan also make a difference in how much money you will get back from a sale.
If you’ve had your mortgage for a while, or made extra principal payments, you might have even more money in your home.
Here are three reasons why knowing how much money you have in your house (e.g. home equity) matters:
1. It gives you more perspective around refinancing
Sometimes, refinancing causes you lose home equity. This can make paying less now on a monthly payment a bad decision a few years down the road when you sell your home and get less back. If you know how much home equity is in your home, then you can compare the amount in home equity that you will have in the future on your current mortgage with what you would have in the future if you refinanced. Find out more about this phenomenon here.
2) It gives you a clearer picture of your overall net worth
You might have savings, you might have a retirement fund, you might have investments – these all add up as part of our net worth. But, many times we don’t think about our home equity as part of our total finances. Home equity is often the largest part of a homeowner’s net worth, and adding it to your financial picture helps you to understand it and protect it.
3) It will help you plan for a potential sale
Maybe you’ll sell your house this year, maybe you’ll live in it forever. If you do sell your home, the amount of money that you have in your house can make a big difference. You’ll get back the sale price, minus fees you paid for selling it, minus the amount left on your loan. Let’s say that your house sold for $400,000 and you had $16,000 in fees and a $200,000 loan balance. You’d get back $184,000. That’s news you can use! Knowing how much you have in your home – or, your “home equity” – helps you plan for the future.
Also, if you are keenly aware of your home equity, you can make better decisions during a sale of your home related to trade offs with costs such as real estate broker fees, and other charges. As home equity is the amount of money you get back from a sale of a home, minus the fees, being aware of this figure helps prevent the check you will receive from getting smaller. Be proactive!
Do you want to learn more about how to make your home a financial success, no matter how much money you have in your home? Read about our new book: The Game Plan for Homeowners: Control your Destiny and Win Big While Avoiding the Traps. It’s available now in both digital and print copies and takes you through everything you need to know about making your home a financial success in the short and long term, without getting taken advantage of.