Honolulu homeowners who have been in their homes for five, 10 or even 15 years may be wondering if it’s time to upgrade to their “dream” home. The best time to move up to that newer, roomier home might be now, while interest rates remain at near-historic lows.
“The way people move up the housing ladder is to purchase a starter home, then, when you’ve gained some equity, roll those gains up into a down payment on the home of your choice,” said Scott Higashi, president and CEO of Locations.
What is home equity?
Home equity simply means your home’s market value minus the amount you still owe on your loan. There are two ways home equity increases over time. The first is by repaying your home loan. The more that you are able to pay down your home loan, the greater the home equity you will have.
The second way home equity rises is by price appreciation. Homeowners in Hawaii have seen a steady price appreciation of about 5 percent for the last several years.
For example, a couple who purchased a single-family home in 2012 for the median price of $625,000 at the time, is now ready to trade up to a larger home. Assuming their home is valued at the 2017 mid-year median price of $758,000, these homeowners have already earned $133,000 on their initial investment. This is without taking into account their monthly loan repayments, which would also increase their home equity. This same couple could now afford to purchase a more-expensive home using the equity from their first home.
Homeowners who have been in their homes even longer may have made greater gains. Those who purchased their homes before 2009 — when interest rates were higher — could potentially lower their monthly payments when they trade up, thanks to a larger down payment and a lower interest rate.
What’s my home equity?
To assess your home equity, you’ll need to estimate the value of your home and subtract from it the balance of your home loan. If you’re not sure of the current value of your home, go to locationshawaii.com/homevaluator for the most accurate home value estimate, made specifically for Hawaii’s unique market.
Once you’ve estimated your home equity, there are a few ways to use it to your advantage. Some homeowners will use their equity to finance their children’s education or to cover another major expense.
However, financial professionals often advise that the best uses of home equity are to upgrade the existing home, add an accessory dwelling unit (ADU) to generate additional income or sell the home and reinvest in a more desirable home.
“These uses of home equity are more likely to build long-term wealth,” added Higashi.
Waiting can cost you
Did you know that waiting to trade up can cost you? The reason has to do with appreciation. At 5 percent appreciation, a $500,000 home appreciates by $25,000 a year, but during that same time period, an $800,000 home will appreciate by $40,000 a year. By waiting to move up, homebuyers are actually leaving $15,000 a year on the table.
It’s a good time to sell
With less than three months of remaining inventory, Honolulu is currently considered to be a seller’s market.
A home that’s in good condition, in a sought-after neighborhood, which is staged and priced appropriately, will likely sell quickly, so homeowners who are looking to move up should work with a REALTOR® to ensure they are financially prepared to sell and purchase at the same time. Remember, while there are fees involved in selling your home, there is no additional cost to be represented by a REALTOR® when purchasing a home.
For an even more detailed home value analysis or advice on how to trade up for a new home, contact your Locations agent.