How important is the amount of Equity in a home for Home Trading?

A lot of people are putting emphisis on the amount of equity people have in their home for trading. Some feel that this is an important factor, but the reality of it is that it really doesn't matter unless you are doing an equity trade, and even then it may not be as important as you think. Here's the thought.

Home Trading is no different than buying a home through conventional means. In other words, lets say you went with a Realtor to look at a home that was listed on the MLS. You tour the home and found that you liked it and were ready to make an offer. Would it matter to you how much equity the owner had in the home? Of course not. That is why it shouldn't matter when Home Trading. Sometimes certain circumstances can make the amount of equity a factor. Some of those might be:

1. If you are looking to do an equity trade (and currently have a mortgage) having equal amounts of equity can be offset by mortgage amounts. An example would be: Two homes both valued at $300,000. They both have $100,000 in equity. They can trade but you still need to get a $300,000 mortgage using the $100,000 or whatever part of the equity you want (or lender requires) for a down payment. Using your equity as a down payment essentially looks to the bank as though you are putting a 33% down payment on a home. What if you sold each other your homes, respectivly for $200,000? Saying "We both have $100,000 in equity, it's even" That's true, however you still need to obtain a $200,000 loan from a lending institution. In this economic crunch they are certainly going to require a down payment. The days of "Zero Down" are few and far between. A good question here (I am not sure of the answer,) is it beneficial to both parties to sell at the lower price of $200,000 for tax purposes?

2. Two homes, free and clear of all debts can trade with no money (other than closing costs) if the homes are of equal value. This is what most people think of when you say home trading. This is a true Equity Home Trade and may be a little difficult to find. Not that they are not out there but the chances are greatly diminished that you can find the right home, in the right area, that is equal to yours AND the same for that same homeowner you are looking to trade with. Not that it can't be done but the gap closes as more specifics are added.

3. Two homes, free and clear of all debts can trade, even if one home is valued higher. One home (a) is valued at $300,000 dollars. The other home (b) is valued at $250,000. Homeowner (b) will have to come up with or obtain through some sort of financing the balance of $50,000. This is where creative financing comes in. Homeowner (a) may consider "holding paper" or a note for the balance of $50,000 for a specific period of time at a certain % rate.

This is why a lot of sites ask if you are willing to trade up/down. Allowing for equity in your home to be used as though it were a down payment, you may choose for whatever reason to go up in price. If your home is valued at $250,000 and you have $100,000 in equity in your home and you are looking at a home that is valued at $400,000 you are well aware that if you trade homes with that $400,000 homeowner you must obtain financing in the amount of $300,000 (assuming you used the $100,000 as a down payment)

The other side of that is if your home is Valued at $400,000 and you want to trade down to a home valued at $250,000 and you have $100,000 equity in your home, you will need to obtain financing in the amount of $150,000. The difference of your equity and the value of the home you are buying. However, if you have $250,000 worth of equity in your $400,000 home and still want to purchase a $250,000 home, it would cost you nothing (except closing costs and maybe some sort of taxes depending on your situation). Simply put, someone is buying your home at $400,000. They obtain financing for that amount. Just like in a conventional real estate transaction the $400,000 is paid minus the outstanding mortgage balance (plus the other fees but for this example just using mortgage value) of $300,000. Leaving $100,000 to put as a down payment on your new $250,000 home. Leaving you a new mortgage of $150,000.

Some home traders have the misunderstanding of the Home Trading industry. They feel that if the person they want to trade with doesn't have enough equity in their home they should not trade with them. The truth is, as long as they are not "upside down" in their mortgage (owing the bank more than the home is worth) and can get financing there is no reason the amount of equity in a home should matter.