Sunday, 4 February 2024
by Rose White
Image source: Getty Images
Spring is just around the corner, and you know what that means — real estate season is about to start. But given the fact that homes purchased just two years ago were bought with mortgage interest rates below 4%, not everybody can afford to sell their home, even if they really want to.
It’s not exactly free to sell a home, which is a bit of an issue for people who haven’t had their homes for very long or who may have refinanced recently looking for a better mortgage rate and some cash for projects. There are a lot of expenses involved, even if you use a fairly no-frills approach and hire a real estate agent to do your heavy lifting.
In a lot of markets, it costs at least 6% of the sales price to get full-service agents involved in your transaction. This will depend on what kind of house you have for sale and how difficult it will be to sell, though.
Your buyer has the right to ask for repairs to your home, especially for problems that could be potentially serious. This can cost major money, and if you want to sell the house for top dollar, it absolutely must be done. That means correcting electrical problems, addressing structural problems, remediating mold and radon, and so on. This is why it’s good to get a pre-sale home inspection, which also costs a few hundred dollars.
You will have to pay some amount of closing costs to close your sale, as well. Sometimes sellers pay closing costs on behalf of the buyer, but just the costs that you will pay yourself can be several thousand dollars, depending on where you live and what closing services are required.
These costs together are estimated to be upward of 10% of your home’s sales price, but will be based on what kind of repairs and other services you may need to get the job done.
You may have substantial equity in your home, even if you’ve just owned it a few years. From December 2020 to December 2023, the median sales price of a home in the United States went from $334,074 to $403,164, just over a 20% increase for doing absolutely nothing except keeping your house from catching on fire or falling down.
But you also have whatever equity came from paying down your mortgage in that time period. With a sub-4% mortgage rate, you could have paid down a good bit of equity, too, along with the credit you got immediately for your down payment. The National Association of Realtors says the average for a first-time home buyer is about 6%.
You might easily have 26% equity in your home right now if you’ve owned it for three years. That’s a fantastic bank for future home repairs and shedding costs like your mortgage insurance.
So, can you afford to sell your home? If you spend 10% of your home’s price tag on selling it, and you’ve got 26% equity, you’ve still got 16% to bring to closing, right? That’s not too shabby.
Let’s say you paid the median price for your home in December 2020, $334,074, and brought 6% down like the average first-time buyer. That month, interest rates on 30-year fixed rate mortgages were around or under 3%. So your payment, without taxes or insurance, is about $1,323.
A house like yours now brings $403,164 — and interest rates are closer to 7%. So even with all that equity and a 10% down payment, your principal and interest payment for the same house is suddenly $2,421 each month, or about $1,100 more.
You didn’t do anything, you sold your old house, bought a new house, and bam. Suddenly the bills are bigger for no discernible reason.
What happened to your home equity?!
Well, everybody got the same equity bump. This is also why a lot of people really can’t afford to sell their homes right now. If interest rates had stayed the same, for example, even with only 10% down, you’d still be facing just a $200 increase in your principal and interest payment, not a $1,100 one!
Now that you know what it costs to sell, you may be alarmed at this information. For some people, it still makes sense to move to a new home. Maybe you’re having a baby or you need to move to another town — these are all good reasons to sell, even if it’s going to cost you more than you thought.
Another slick way to deal with the current market is to sell your home and move somewhere cheaper. Not to a smaller house, necessarily, but to a lower-cost market. That might be further out in the suburbs, or to a less desirable part of your metro area, or even to another state if your job allows remote work. It’s likely that equity appreciation has kind of peaked and will be very slow for a while, so this would be a way to capture that value for good.
Selling your home is a personal decision, but it’s important to understand what it actually costs to do this, as well as how much you could gain (or not) by doing so with a more expensive mortgage.
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