Take
Advantage of Your Home Equity: A Homeowner’s Guide
Homeownership
offers many advantages over renting, including a stable living environment,
predictable monthly payments, and the freedom to make modifications.
Neighborhoods with high rates of homeownership have less crime and more civic
engagement. Additionally, studies show that homeowners are happier and
healthier than renters, and their children do better in school.1
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,2 and a recent study showed
that the median net worth of homeowners can be up to 80 times greater than that
of renters in some areas.3
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.
$250,000 (Home’s Market Value)
- $200,000
(Mortgage Balance)
______________________________
$50,000
(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. That means the amount of money you owe the bank is reduced every
month. As your loan balance goes down, your home equity goes up.
Additionally,
unlike other assets that you borrow money to purchase, the value of your home
generally increases, or appreciates, over time. For example, when you pay off
your car loan after five or seven years, you will own it outright. But if you
try to sell it, the car will be worth much less than when you bought it.
However, when you purchase a home, its value typically rises over time. So when
you sell it, not only will you have grown your equity through your monthly mortgage
payments, but in most cases, your home’s market value will be higher than what
you originally paid. And 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?
Now
that you understand the benefits of building equity, you may wonder how you can
speed up your rate of growth. There are two basic ways to increase the equity
in your home:
1) Pay down your mortgage.
We
shared earlier that your home’s equity goes up as your mortgage balance goes
down. So paying down your mortgage is one way to increase the equity in your
home.
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—like an annual bonus, gift, or inheritance.
Before
making any extra payments, however, be sure to check with your mortgage lender
about the specific terms of your loan. Some mortgages have prepayment
penalties. And it’s important to ensure that if you do make additional
payments, the money will be applied to your loan principal.
Another
option to pay off your mortgage faster 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.
Boosting
the market value of your property is another way to grow your home equity.
While many factors that contribute to your property’s appreciation are out of
your control (e.g. demographic trends or the strength of the economy) there are
things you can do to increase what it’s worth.
For
example, 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 your home.
In fact, according to Remodeling Magazine’s latest Cost vs.
Value Report, the remodeling project with the highest return on investment is a
garage door replacement, which costs about $3600 and is expected to recoup
97.5% at resale. In contrast, an upscale kitchen remodel—which can cost around
$130,000—averages less than a 60% return on investment.4
Of
course, keeping up with routine maintenance is the most important thing you can
do to protect your property’s value. Neglecting to maintain 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?
When
you put your money into a checking or savings account, it’s easy to make a
withdrawal when needed. However, tapping into your home equity is a little more
complicated.
The
primary way homeowners access their equity is by selling their home. Many
sellers will use their equity as a down payment on a new home. Or some
homeowners may choose to downsize and use the equity to supplement their income
or retirement savings.
But
what if you want to access the equity in your home while you’re still living in
it? Maybe you want to finance a home renovation, consolidate debt, or pay for
college. To do that, you will need to take out a loan using your home equity as
collateral.
There
are several ways to borrow against your home equity, depending on your needs
and qualifications:5
1) Second Mortgage - A second mortgage, also
known as a home equity loan, is structured similar to a primary mortgage. You
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. Keep in mind, if you
take out a home equity loan, you will be making monthly payments on both your
primary and secondary mortgages, so budget accordingly.
2) Cash-Out Refinance
- With
a 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 to a second mortgage 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) - A home equity line of credit, or 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. A HELOC may come with a checkbook or debit card to enable easy access to funds. You will only need to make payments on the amount of money that has been drawn. Similar to a credit card, 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. In most cases the average american can pay off there home and debt in under 10 yrs using this strategy. For Further information on how to do this Contact Me.
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.6
Tapping
into your home equity may be a good option for some homeowners, but it’s
important to do your research first. In some cases, another type of loan or
financing method may offer a lower interest rate or better terms to fit your
needs. And it’s important to remember that defaulting on a home equity loan
could result in foreclosure if you do not know what you are doing. Ask me for a referral to a lender or financial
adviser to find out if a home equity loan is right for you.
I'M HERE TO HELP YOU
Wherever
you are in the equity-growing process, I can help. I work with buyers to find
the perfect home to begin their wealth-building journey. And sellers to maximize the above senerios to pay down debt quickly. And when you’re ready
to sell, I can help you get top dollar to maximize your equity stake. Contact
me today 801.997.1770 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.
Sources:
1. National Association of
Realtors -
https://www.nar.realtor/blogs/economists-outlook/highlights-from-social-benefits-of-homeownership-and-stable-housing
2. Urban Institute -
https://www.urban.org/urban-wire/homeownership-still-financially-better-renting
3. Census Bureau -
https://www.census.gov/library/stories/2019/08/gaps-in-wealth-americans-by-household-type.html
4. Remodeling Magazine -
https://www.remodeling.hw.net/cost-vs-value/2019/
5. Investopedia -
https://www.investopedia.com/mortgage/heloc/home-equity/
6. Bankrate -
https://www.bankrate.com/mortgage/reverse-mortgage-guide/
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