Buying a new home is always an exciting milestone, whether you’re upgrading to a larger space, downsizing to a cozy haven, or relocating to be closer to loved ones.

However, it also comes with different financial considerations, the biggest being funding the transition. For many homeowners, the key to unlocking their next move lies in leveraging their current home’s value. Dive into the details of home equity to see how it can play a crucial role in making your new space a reality.

What is home equity?

Home equity is the portion of the property that you truly own—as you pay down your mortgage, this figure goes up. Calculating it is relatively straightforward: subtract your remaining mortgage balance from your home’s current market value. For example, if your home is worth $400,000 and you owe $250,000, you have $150,000 in equity. And when you sell, that is approximately how much you can expect in profit (minus closing costs, agent commission, and other fees). You can then use those funds to facilitate your move into a new home without the need for extensive cash reserves.

Building home equity

Home equity growth is generally gradual and influenced by several factors, only some of which are in your control. The primary ones include:

• Your mortgage amount: With each monthly payment, a portion goes toward reducing your principal balance to boost your held equity.
• Rising property values: If the real estate market in your area is strong, the value of your home may rise, increasing how much you may be able to get for it when you sell.
• Home improvements: Upgrades and renovations can also add value to your home and drive up its selling price.

A big unifier between all these is time. The longer you own your home, the more you’ll pay off your mortgage, the more areas of it you’ll end up fixing or updating, and the more its value will grow, depending on the state of the real estate market. In turn, you’ll likely experience substantial equity growth over the years, providing you with a robust financial foundation for your next move.

How to use it to move

When moving, you can leverage your home equity in several ways. One common strategy is selling your current home and using the net profit as a down payment on a new property. This, of course, requires good timing since you’d need to be able to find and close on another house before you have to move out. Otherwise, you’ll have to find temporary housing to bridge the gap.

Alternatively, you can tap into your equity before selling your home with a home equity loan or home equity line of credit (HELOC). These allow you to borrow against your equity to gain access to funds you can use to put toward a down payment on a new property. Other potential options include a bridge loan, a short-term loan that is designed to hold the fort until the borrower gets permanent financing or pays off debt, and a cash-out refinance, which pays off your current mortgage with a higher one to give you extra cash at hand. In all cases, you can then use the profit from selling your home to pay off the debt.

The cons

While borrowing against your equity or taking out another loan can be viable strategies, there are certain potential downsides to keep in mind, such as:

• Up-front costs: Some home equity products come with fees, including closing costs, appraisal fees, or annual maintenance fees, which can reduce the net benefit of borrowing.
• Increased debt load: Borrowing adds to your overall debt, perhaps putting a strain on your finances even in the short term. It’s essential to ensure that you have the income to handle the added payments until you can sell your home.
• Market fluctuations: If property values decline, the equity in your home could decrease, possibly leaving you owing more than your home is worth. This is known as being “underwater” on your mortgage.
• Change of foreclosure: Since home equity loans and lines of credit are secured by your home, failing to make payments could lead to foreclosure. This is usually not as big of a concern, though, since your home likely won’t be on the market long enough to initiate the foreclosure process.

Be smart

As with any financial consideration, the best way to minimize your risks is to be as informed as possible and employ strategies that cover as many bases as possible. Here are some top ones to consider:

1. Get a home appraisal to determine the current market value of your home, then compare that to your most recent mortgage statement to get an accurate estimate of your held equity.
2. Consult a lender to discuss all your options and their details. For instance, home equity loans and HELOCs often have borrowing limits of up to 80 percent of your current equity.
3. Add a contingency clause to the contract of your home purchase or sale if you aim to do them simultaneously. That way, should one encounter complications, you won’t be obligated to go through with the other.

In the end, home equity is more than just a number on paper—it’s a resource that can help you move into your next home. By understanding how to build and use it effectively, you’ll be better prepared to navigate the next steps in your homeownership journey. For personalized advice, consult a real estate agent, who can guide you through the process and connect you with a financial professional. Your dream home could be closer than you think!