U.S. CitiesCity-Data Forum Index
Covid-19 Information Page
Go Back   City-Data Forum > General Forums > Real Estate > Mortgages
 [Register]
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
View detailed profile (Advanced) or search
site with Google Custom Search

Search Forums  (Advanced)
 
Old 08-23-2012, 10:36 AM
 
354 posts, read 1,004,707 times
Reputation: 282

Advertisements

Looking for someone to explain to me how putting down 20 percent builds instant equity(which i have). Im afraid of putting 20 percent down And losing it all if i decide to sell....
Rate this post positively Reply With Quote Quick reply to this message

 
Old 08-23-2012, 10:48 AM
 
3,578 posts, read 6,330,177 times
Reputation: 1433
In the hey days of 2000-2007, the word "equity" in regards with housing was fake/make believe "equity" if one never put any money down

In the context of real estate, equity means the difference between how much the home is worth right now vs. how much you will receive (after all expenses of transfer taxes/real estate commission).

So if brought your home for $500K with 20% down. Your equity really isn't $100K. It's already probably closer to $70K (after accounting for potential selling costs of around 4-8% of the home).

It was assume real estate values would keep going up. So many assumed home values would go up 10-15% each year. So even if they didn't put any money down, they could resell and make a profit.

But one must also assume you will eat into the principal payments of roughly 10% of loan value after 5 years. So if one stays in home for at least 5 years, (assuming home values don't go anywhere). than you could "break even" by getting back your original equity. So after 5 years, if you made principal payments, your loan at $400K would be roughly 360K. And and after selling costs of around $30K. You would get back roughly 100K (your original equity).

But Americans are lazy/greedy etc and don't like building equity the hard way. They just assumed home values would keep on going up and many never bothered putting their own equity into the homes (those who put no money down and/or interest only loans that never touched the principal.
Rate this post positively Reply With Quote Quick reply to this message
 
Old 08-23-2012, 11:43 AM
 
1,785 posts, read 3,164,752 times
Reputation: 1279
The only way you would lose it all if you decide to sell is if your house priced dropped by 20% of it's current value. Hopefully you are not buying into such a situation.

But even if you put 5% down and it dropped 20%, now you are underwater and are forced to short sell if you wanted to move later.

Equity matters for getting better rates on new loans and refinances - and that saves money! Technically what matters is a related concept called Loan-to-Value (LTV), which is just what it sounds like: the ratio of your loan amount to your house value. So by putting 20% down, you are at 80% LTV day 1. Pay off 10% of that loan over 5 years, and (assuming your house price doesn't go up or down), you'd be at 72% LTV.

Is that the same as 28% equity*? Well, depends on how you look at it. As aneftp mentioned, you will have costs associated with selling, so you should probably factor that into your calculation of how much money is sitting tied up in your house.


* Usually in real estate you would think of 'equity' as an amount expressed in dollars, not percentages, but you get the idea (since I didn't use any actual house prices)
Rate this post positively Reply With Quote Quick reply to this message
 
Old 08-23-2012, 12:23 PM
 
3,578 posts, read 6,330,177 times
Reputation: 1433
Quote:
Originally Posted by snowdenscold View Post
The only way you would lose it all if you decide to sell is if your house priced dropped by 20% of it's current value. Hopefully you are not buying into such a situation.

But even if you put 5% down and it dropped 20%, now you are underwater and are forced to short sell if you wanted to move later.

Equity matters for getting better rates on new loans and refinances - and that saves money! Technically what matters is a related concept called Loan-to-Value (LTV), which is just what it sounds like: the ratio of your loan amount to your house value. So by putting 20% down, you are at 80% LTV day 1. Pay off 10% of that loan over 5 years, and (assuming your house price doesn't go up or down), you'd be at 72% LTV.

Is that the same as 28% equity*? Well, depends on how you look at it. As aneftp mentioned, you will have costs associated with selling, so you should probably factor that into your calculation of how much money is sitting tied up in your house.


* Usually in real estate you would think of 'equity' as an amount expressed in dollars, not percentages, but you get the idea (since I didn't use any actual house prices)
Sort of correct. Remember buying (and especially selling) real estate involves a certain percentage of the home. With state/county transfer taxes (excluding escrow since you will eventually get the money back).

Say I am closing on a home to purchase tomorrow (or monday). Just to "buy" the home will cost me about $5000 (in owner's title/state taxes). This excludes the roughly $8K escrow (which I will get back anyways or most of it depending on when I sell home).

And to sell (even with an agent) will cost me roughly $7000 in taxes/title etc.

Add 3-6% real estate transactions costs for commision. It's hard to even do FSBO because buyer's agents usually demand 3% themselves for bringing their own client.

So when you purchase a home with 20% you are really only working with about 13-15% left. The longer you stay in the home, the more "equity"/eat into the principal (assuming prices stabilize).
Rate this post positively Reply With Quote Quick reply to this message
 
Old 08-23-2012, 01:10 PM
 
1,785 posts, read 3,164,752 times
Reputation: 1279
Yeah I get that there's transaction costs that make a quick buy-and-sell actually a negative proposition (see 4th paragraph), however, my first sentence was in response to the OP being afraid to lose his down payment when selling (since I assumed he was talking about 20% down vs a lower down payment). "Lose it all" was in the context of additional down payment money - I guess that wasn't clear.

In that case, the transaction costs don't affect the wisdom of putting down 20% vs., say, 5%, since they're fixed and independent of equity.
Rate this post positively Reply With Quote Quick reply to this message
 
Old 08-24-2012, 10:20 AM
 
354 posts, read 1,004,707 times
Reputation: 282
So putting 20 percent down is better build equity then?
Rate this post positively Reply With Quote Quick reply to this message
 
Old 08-27-2012, 01:43 PM
 
2 posts, read 6,237 times
Reputation: 10
Default no-ratio refinances?

Does anyone know where on Long Island you can get a no-income check mortage? I'm self-employed with 750+ credit score and a huge amount of equity in my home. None of the area banks will do a no-ratio mortgage.
Rate this post positively Reply With Quote Quick reply to this message
 
Old 08-27-2012, 03:14 PM
 
1,785 posts, read 3,164,752 times
Reputation: 1279
Quote:
Originally Posted by mi26 View Post
So putting 20 percent down is better build equity then?
I'm not sure what you're getting at - I'll refer you to the posts above.

As previously stated, equity is the difference between the value of your home, and how much you owe on it.

So anything you "put down" by definition builds instant equity, as it reduces that latter value.

Having a larger down payment also usually gets you a better interest rate, which means you'll "build equity" faster as you make your mortgage payments, since a smaller chunk of the payment will go to interest, and thus more to principal (equity).
Rate this post positively Reply With Quote Quick reply to this message
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.

Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.


Reply
Please update this thread with any new information or opinions. This open thread is still read by thousands of people, so we encourage all additional points of view.

Quick Reply
Message:

Over $104,000 in prizes was already given out to active posters on our forum and additional giveaways are planned!

Go Back   City-Data Forum > General Forums > Real Estate > Mortgages
Similar Threads

All times are GMT -6.

© 2005-2021, Advameg, Inc. · Please obey Forum Rules · Terms of Use and Privacy Policy · Bug Bounty

City-Data.com - Contact Us - Archive 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37 - Top