For the last decade, we have seen real estate prices continue to rise. Record low mortgage rates have helped fuel the return of increasing homeownership rates. Those who bought their homes 10 years ago have seen the largest financial gains, but the lingering question in the back of every homeowner’s mind is when to sell.
Many think selling should be based on when the market hits a peak, but is that the case?
Your personal residence is a great way to grow wealth. According to current data from Zillow, median home prices in the U.S. have increased by 37%. For homeowners, that means if you bought a house for $250,000 eight years ago, it now could be worth over $340,000.
Home appreciation is the mythical savings you can’t touch but hope is still there when you sell. The selling date, of course, isn’t known. Homeowners see their neighbors sell for high prices and assume their homes have appreciated similarly. Assumed value increases convince you not to sell and to allow value to keep growing. Besides, if you sold, you’d just be buying in the same high-priced market.
The Second Mortgage
Many impatient homeowners eager to get to their home’s appreciated value will take out a second mortgage. This allows for cash now, but comes with its own risk and flavor. Lenders may offer everything from a fixed second mortgage to a flexible line of credit with a higher interest rate that you can pay down as you like.
Such home equity loans were very popular in the pre-2008 market, and many learned the hard way that the increased value doesn’t actually exist until you sell. Those second mortgages turned into the weight that put many homeowners underwater.
Borrowing against future home value increases is a gamble.
Is Now The Time To Sell?
Following home price trends isn’t the only thing to consider when it comes to selling your property. There are additional benefits that should be assessed before making such a decision. When you sell your house, you may not be able to keep all the gain. Uncle Sam wants his cut with the capital gains tax, but he has given some opportunities if you’ll take advantage of them.
If the home is your primary residence and you have lived in it for at least two years, then you can avoid paying capital gains on up to $500,000 (if married) of profit. On a house currently worth $350,000 with $100,000 in gains, you may not see the need to sell now.
But selling your home now does allow you a few advantages.
1. The future will be here before you know it, and your home will appreciate. If you’ve lived in a typical home for 20 years, it could be worth nearly $700,000. If you are single, then you’ll be paying a large capital gains tax, and as a married couple you’ll be near your limit.
2. You can actually claim the gain on your home now, so it is no longer a nebulous future possibility. There’s no need for a home equity loan, because you can get access to the real cash equity from your sale.
3. Selling now means you will be buying another house at those same prices. Taking your profit and putting it toward a down payment will allow you to buy a new home with a mortgage near your previous amount (but most likely with a lower interest rate), which will keep your monthly expenses near the same. However, buying a new house at higher prices resets your capital gains exemption to the higher amount.
4. The current market is looking for value-add opportunities, so selling your house as-is may save you from having to do anything. The stress and burden of having to make repairs or remodel can all go away, as those are great selling features in this market. If all repairs on your house will cost near $50,000, then you can set the selling price $20,000 under market and claim it as a “repair credit” and net that $30,000 without having to do anything.
5. You never know how long such a tax break will be in place. If legislators decide to sunset such an exemption, imagine how many homeowners will be trying to sell before it is gone. If you proceed while the market is high, you can more easily transition to another home.
Taking advantage of your home’s equity now and selling will allow for more benefits than sitting on it or tapping into a home equity loan. As one of your largest family investments, it is worth at least considering a sale.