Thinking of selling your home? The amount of equity you have built up can dictate how you’re able to proceed. A good rule is to have at least 10% equity to cover the realtor’s commission and closing costs. But most experts recommend aiming for 20% or more, which puts home sellers in a stronger financial position.
Equity matters during the home sale because it directly affects how much cash you’ll actually receive after the sale. Underestimate your equity, and you can end up losing on potential profit, owing money at closing, or struggling to afford your next home.
Want to keep more equity when you sell? Clever connects you with top local agents for just 1.5% commission, saving you thousands of dollars. Our commission model might make a big difference in how much cash you take home from the sale.
Equity when selling at a glance
⚠️ Minimum: 10% to cover most costs and the realtor’s commission
✅ Recommended: 20% or more to maximize profit and flexibility
⛔ Not recommended: Less than 5%, which could mean owing money at the closing
How much equity should I have before selling?
❓Let’s start with the basics: What exactly is home equity?
Home equity is your ownership stake in the property, the difference between your home’s value and how much you still owe on your mortgage.
For example, if your home is worth $400,000, and your mortgage balance is $300,000, you have $100,000 (or 25%) equity.
Ideally, experts recommend having around 20% equity when selling a home. This will allow you to comfortably cover any costs associated with paying off a mortgage, closing on a home, and financing the purchase of a new place.
The minimum to break even, in many cases, would be selling with 10% equity. However, if an unforeseen issue arises, you might need to cover some of the sales costs from your savings.
As Wesley Kang, founder of 1099Cafe, shared, “My client Mariana found $18,000 in roof and plumbing issues during her listing prep that turned her 16% equity into a break-even situation.”
What happens to home equity when I sell my house?
When you sell, equity is used to pay off the remaining mortgage and cover costs associated with the sale, including:
- Real estate agents' commission, which typically adds up to 5–6% of the selling price
- Closing costs, which can be anywhere from 2–5%
- Potential repairs or concessions to the buyer
- Taxes, such as capital gains and transfer taxes
Anything left over is yours to use for your next home, savings, or other financial goals. That would be considered net proceeds — the amount of money you actually receive from the sale after deducting all the expenses that come with selling a home from the sales price.
❗Net proceeds = Sale price – (Mortgage payoff + Closing costs + Agent’s commission + Other expenses)
If you want to buy a new home using funds from the sale, taking your equity into account is fundamental.
“Sale proceeds fund down payments and determine loan qualification,” explains Kang. “My client used $85,000 from her sale for 20% down on her next house, avoiding PMI and getting better rates.
“Minimal equity sales force buyers into low-down-payment loans with higher costs and qualification challenges.”
Why do you need equity when selling?
When selling your home, it’s advisable to have sufficient equity for several reasons.
Covering your mortgage
When you sell, the proceeds from the transaction are first used to pay off your remaining mortgage and any additional home equity loans.
Without sufficient equity, you may need to tap into your savings to cover the difference.
Paying selling costs
The total cost of selling a house can come to 8–10% of the sale price. Sufficient equity ensures that these expenses will be covered from the sale proceeds, rather than being paid out of pocket.
Maximizing your profit
More equity means the possibility of putting a larger down payment on your next home.
As Chris Heerlein, the CEO of REAP Financial, notes, “Your future down payment is also dependent on how much equity you have and whether or not you have to put down PMI, which could add hundreds of dollars a month to your new mortgage.”
Getting more flexibility for your next move
More equity can provide a larger financial cushion and make the overall process smoother. For example, you can use the proceeds to pay for your move, rent for a few months if needed, or reinvest.
How equity affects your net proceeds
Let’s look at a simplified example of how your equity affects the outcome when selling a home by comparing selling a $400,000 house with $50,000 vs. $100,000 in equity. Imagine selling costs are 8% total ($32,000), including the agent’s commission and closing costs.
Scenario 1: $50,000 in equity
First, the funds from the sale will be used to cover your mortgage balance, which is $350,000 (the value of the home minus your equity). After that, you would be left with $50,000 to cover selling costs.
That would leave you with $18,000 in net proceeds. This may not be enough for a substantial down payment on your next home or to cover moving and other post-sale expenses.
Scenario 2: $100,000 in equity
In this scenario, you are left with $100,000 after paying your mortgage balance. After deducting selling costs, your net proceeds are $68,000, providing you with greater flexibility for your next steps.
How can I build home equity before selling?
Building home equity means increasing the portion of your home that you truly own (paid off) or increasing the home’s value, which will, in turn, boost your equity. Here are two main ways for how this happens:
- Decreasing the amount owed on your mortgage
- Increasing your home’s market value
There are multiple ways to increase your home equity if you want to sell sooner.
For example, you can consider refinancing to a shorter-term loan, make strategic home improvements that will significantly increase your home’s value, or paying down your mortgage principal faster.
If you want to increase your equity before selling your home, talk to a real estate professional to come up with a plan that will work best for your financial situation.
Can I sell my home with low equity?
Theoretically, you don’t have to have any equity to sell a home. But if you don’t, you will lose money on the sale. You'll need to pay off the portion of the mortgage that isn’t covered by the sale price and also cover the sales costs out of pocket.
You may need less equity depending on market conditions. “In a hot market and with low inventory, you may be able to sell with lower equity and be ahead in the long run,” mentions Heerlein.
“But if the market is cooling or a buyer’s market, you want as much buffer equity as possible to account for any price drops on your property before any of your returns are deducted,” he adds.
When selling with low equity might make sense
Selling your home with low equity is rarely ideal. However, there are situations when it can be a practical or even necessary decision, even before you have had time to build equity. For example:
- Divorce
- Job relocation
- Avoiding foreclosure
❗If the sale price does not cover your mortgage, and you cannot pay the difference out of pocket, it’s called a short sale. While a short sale is preferable to foreclosure, it can impact your credit score and make it more difficult to secure a mortgage in the future.
If you find yourself in a situation when you need to sell with minimal equity, focus on minimizing costs. For example, you can use a low-commission agent and leverage the buyer’s incentives to help close the deal faster.
Is home equity the same as profit?
No, home equity is not the same as profit.
Equity gives you an idea of the ownership stake in your home. Profit is the financial gain on your investment: the difference between your net proceeds from the sale and the original purchase price, factoring in any improvements you made along the way.
❗Profit = Net proceeds – Original purchase price – Improvements
It is possible to have significant equity in your home and still lose money on your investment. For example, if the market value drops significantly after your purchase, you can have equity on paper but end up with little or no profit when you sell.
However, in most cases, you’ll get a purchase price above what you originally paid, especially if you’ve owned the home for a while and choose a highly qualified listing agent.
Keep money in your pocket by selling with Clever
Want to sell your home and maximize the amount of cash you have left? A good place to start would be to know your home’s value and estimate the realtor’s commission and closing costs in your state.
Also, consider saving money on your agent’s fees by working with a Clever Partner Agent. Get a full-service experience from a top-rated realtor in your market, but pay a low, flat fee of 1.5% ($3,000 minimum).
FAQ
Yes, you can sell your home with no equity, but you may need to pay out-of-pocket at closing to cover selling costs.
Alternatively, a lender-approved short sale allows you to sell for less than you owe, though it can impact your credit score and your borrowing power.
To calculate your home’s equity, subtract your mortgage balance from your home’s market value. For example, if you owe $250,000 on a $400,000 home, your equity is $150,000.
The answer depends on your loan type, your interest rate, your original down payment, the home’s current value, and the overall state of the real estate market.
Equity typically grows slowly at first because early mortgage payments mostly cover interest. However, equity can increase more quickly if your home value has increased throughout the year.