Affordability is one of the biggest challenges around inventory today. Most people feel stuck in their homes not because of their interest rate but because they are not considering their total household debt payment and implementing an equity transition plan.
Home equity is at an all-time high but so is the amount of consumer debt (credit cards, car payments, personal loans, etc.) and the interest rates on those debts have skyrocketed over the past year.
Many of your clients likely have monthly payments on non-mortgage debts that have increased over the past several years. We recently worked with a client who was in this exact situation. They had accumulated substantial equity over the years and wanted to move up, but doing so with current rates meant their mortgage payment would increase by over $1,500 – even with a 25% down payment!
But there were two problems with how they were approaching their new purchase:
They didn’t realize that by reducing their down payment and using some of their equity to pay off all their non-mortgage debt, they could purchase their dream home and only increase their total monthly payment by $400 - even with an interest rate that was 3.5% higher!
Homeowners are conditioned into thinking they must move all their equity into their new home to pay as little as possible and avoid mortgage insurance. What they don’t realize is that using their equity to reduce their total household debt payment is almost always more effective at making a new purchase more affordable.
In the quest for a home, smart financial planning matters. Using home equity wisely can make owning a dream home more affordable. By breaking the norm that all equity must go into the new home, this approach empowers homeowners to navigate the real estate journey with greater financial ease. As agents, sharing these insights can help clients imagine a more affordable path to their dream homes.