Are you facing foreclosure on your Pittsburgh home? If so, one thing you might be wondering is: “What happens to my home equity in foreclosure?” This question is particularly relevant if you’ve owned your home for a long time and it’s worth a lot more than you originally paid for it. The answer to what happens to your home equity depends on a number of variables, but in today’s article we’ll explain the basic process in case you find yourself in this situation.
What is Home Equity?
When you first purchase a home, your equity is the amount you contribute for your down payment.
Purchase price of your home: $100,000
Initial down payment: $10,000
Total Loan Amount: $90,000
Home equity: $10,000
Now let’s say you live in the house for 15 years and pay down your mortgage each month during that time. Your home value has also increased during this time. After fifteen years, your numbers might look like this:
Market value of your home: $150,000
Total balance on loan: $50,000
Home equity: $100,000
After 15 years, your home has appreciated (gone up in value) by $50,000. You have also paid down the balance on your mortgage during this time, and now only owe $50,000 to the bank. In this example, your equity is $100,000, which is the difference between the value of your home, and the amount you owe the bank.
What Happens to Home Equity in Foreclosure?
To use the same example, let’s say you’ve been making payments on time every month for 15 years, and that you have a 30-year mortgage. Unfortunately you lost your job 6 months ago and have fallen behind on your payments and are now facing foreclosure.
As we demonstrated above, you have $100,000 in equity in the home, and this is still yours to keep. But…
There are fees, penalties, and interest associated with foreclosure.
Paying your mortgage late means you will owe penalties, fees, and interest to your bank. These include late payments and interest on past due mortgage payments, bank attorney fees, property title searches, and other administrative costs banks incur as part of the foreclosure process. The bank will automatically take these costs from you when they foreclose on your house. Let’s say these fees equal $15,000. You now only have $85,000 in equity.
Listing Price of a Foreclosed Home
When faced with a foreclosure, banks want to sell the house as soon as possible. In doing so, they will often list it for a lower price than it may actually be worth. Using the same example, let’s say they list the house at $130,000 even though it’s worth $150,000 based on comparable sales in the neighborhood. This represents a potential $20,000 decrease in your equity – and that assumes someone pays full list price for your home. Assuming you do receive full list price, here’s a final snapshot of your home equity:
Selling price of your home: $130,000
Fees, penalties, and interest: $15,000
Amount owed on original mortgage: $50,000
Proceeds from the sale to you: $65,000
How to Save as Much Home Equity as Possible During Foreclosure
While $65,000 in home equity may sound nice, you could have earned approximately $35,000 more had you not gone through the foreclosure process. The good news is, you don’t have to wait for your house to be foreclosed on. If you want to sell your house now, you can prevent the lengthy foreclosure process and the fees, interest, and penalties that add up over time. We can pay cash for your property now, so that you can keep as much equity as possible. Fill out our form below to get a no-obligation estimate on what we can pay for your home, and take the first step toward preventing foreclosure today.