Ask the REALTOR: How is it possible to not have equity in your home?

Ask the REALTOR® is a regular video series in which I answer your most commonly-asked real estate questions, with a new Q&A posting every week. If YOU have a real estate question for me, drop me a note here.

This week’s question: How is it possible to not have equity in your home? Here’s the answer in this brief video, and don’t miss the transcript below.

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Transcript:

Hi, this is Cari McGee with Keller Williams Realty. Welcome to this week’s episode of Ask the Realtor. Every week, I answer questions from buyers and sellers — and pretty much everyone in between — regarding real estate.

This week’s question comes to us from Lisa K., who asked, “Cari, how is it possible, in today’s rapidly rising Tri-Cities housing market, for somebody to not have any equity in their home when they go to sell it?”

That’s a great question, Lisa, and here’s why.

Say, for example, somebody purchased a home last year in the Tri-Cities for $200,000 and they used a zero-down loan program, like the VA loan, in order to get that. So, they have a loan for $200,000 — it has not been offset by a down payment of 5%, 10%, or 20% … $200,000 is what they owe. Then, it’s the next year and they learned that they can sell their $200,000 home that they bought last year for $215,000. Not super-typical in the Tri-Cities, but it is becoming a little bit more commonplace to have that kind of rapid appreciation.

So, $215,000, you think … they sell it, they’re going to get $15,000 equity profit and be on their way to their next destination. That’s not how it works because, within that first year — actually the first couple years that you are paying on a mortgage, you’re really just paying money towards the interest on the principal. You’re not paying down your principal at all. So, when they go to sell that house, that $200,000 loan is still there. They don’t owe like $197,000 or $198,000. No, they owe that full $200,000. And after you subtract the associated costs with selling a home, which include taxes, and title, and escrow, and commission fees, then you’re going to be left with less than $200,000. So, the person, if they wanted to go through with this scenario, would need to bring some money to the table to make the deal work.

So, that is how that kind of situation can arise. I hope that answered your question, Lisa. Thanks so much for writing in. And if you have any questions for me regarding real estate, by all means, give me a shout via any one of the methods that are on the screen that follows next. Thanks so much. See you next week.