Homeownership offers many advantages over renting, including a stable living environment, predictable monthly payments, and the freedom to make modifications. But one of the biggest perks of homeownership is the opportunity to build wealth over time. Researchers at the Urban Institute found that homeownership is financially beneficial for most families, and a recent study from the Census Bureau showed that the median net worth of homeowners can be up to 80 times greater than that of renters in some areas.
So how does purchasing a home help you build wealth? And what steps should you take to maximize the potential of your investment? Find out how to harness the power of home equity for a secure financial future.
WHAT IS HOME EQUITY?
Home equity is the difference between what your home is worth and the amount you owe on your mortgage. So, for example, if your home would currently sell for $250,000, and the remaining balance on your mortgage is $200,000, then you have $50,000 in home equity.
The equity in your home is considered a non-liquid asset. It’s your money; but rather than sitting in a bank account, it’s providing you with a place to live. And when you factor in the potential of appreciation, an investment in real estate will likely offer a better return than any savings account available today.
HOW DOES HOME EQUITY BUILD WEALTH?
A mortgage payment is a type of “forced savings” for home buyers. When you make a mortgage payment each month, a portion of the money goes towards interest on your loan, and the remaining part goes towards paying off your principal, or loan balance. As your loan balance goes down, your home equity goes up.
Additionally, the value of your home generally increases, or appreciates, over time. So when you sell it, even if you only put down 10% at the time of purchase or pay off just a small portion of your mortgage—you get to keep 100% of the property’s appreciated value. That’s the wealth-building power of real estate.
WHAT CAN I DO TO GROW MY HOME’S EQUITY FASTER?
There are two basic ways to increase the equity in your home:
1) Pay down your mortgage.
Some homeowners do this by adding a little extra to their payment each month, making one additional mortgage payment per year, or making a lump-sum payment when extra money becomes available.
Another option is to decrease your amortization period. For example, if you can afford the larger monthly payments, you might consider refinancing from a 30-year or 25-year mortgage to a 15-year mortgage. Not only will you grow your home equity faster, but you could also save a bundle in interest over the life of your loan.
2) Raise your home’s market value.
Many homeowners enjoy do-it-yourself projects that can add value at a relatively low cost. Others choose to invest in larger, strategic upgrades. Keep in mind, you won’t necessarily get back every dollar you invest in on upgrades, so consult a professional before making any major investment.
A word of caution: Neglecting routine maintenance of your home’s structure and systems could have a negative impact on its value—therefore reducing your home equity. So be sure to stay on top of recommended maintenance and repairs.
HOW DO I ACCESS MY HOME EQUITY IF I NEED IT?
But what if you want to access the equity in your home while you’re still living in it?
There are several ways to borrow against your home equity, depending on your needs and qualifications:
1) Second Mortgage (or Home Equity Loan) enables you to borrow a lump-sum amount, which you are responsible for paying back—with interest—over a set period of time. Most second mortgages have a fixed interest rate and provide the borrower with a predictable monthly payment.
2) Cash-Out Refinance, you refinance your primary mortgage for a higher amount than you currently owe. Then you pay off your original mortgage and keep the difference as cash. This option may be preferable if you have a high-interest rate on your current mortgage or prefer to make just one payment per month.
3) Home Equity Line of Credit (HELOC) is a revolving line of credit, similar to a credit card. It allows you to draw out money as you need it instead of taking out a lump sum all at once. The interest rate on a HELOC is variable, so your payment each month could change depending on how much you borrow and how interest rates fluctuate.
4) Reverse Mortgage - A reverse mortgage enables qualifying seniors to borrow against the equity in their home to supplement their retirement funds. In most cases, the loan (plus interest) doesn’t need to be repaid until the homeowners sell, move, or are deceased.
Tapping into your home equity may be a good option for some homeowners, but it’s important to remember that defaulting on a home equity loan could result in foreclosure. Ask us for a referral to a lender or financial adviser to find out if a home equity loan is right for you.
WE’RE HERE TO HELP YOU
Wherever you are in the equity-growing process, we can help. We work with buyers to find the perfect home to begin their wealth-building journey. We also offer free assistance to existing homeowners who want to know their home’s current market value to refinance or secure a home equity loan. And when you’re ready to sell, we can help you get top dollar to maximize your equity stake.
Contact us today to schedule a complimentary consultation!
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs