Building Wealth through Home Equity

Building Wealth through Home Equity

Owning a home has long been considered the American Dream. Statistics show that no matter the generation, Americans overwhelmingly believe that homeownership is important. Whether personal, emotional, or financial, there are many reasons why homeownership matters. As an aspiring homeowner, you’ve probably heard one reason repeatedly… Purchasing a home is a great investment and helps to build equity. But what exactly does that mean?

What is equity?

Equity is the difference between how much your home is worth and how much you owe on your mortgage. If you own property, then you likely have some level of equity! As homeowners pay off their mortgage over time, they gain more equity in their home. As home values rise, the amount of equity also rises. 

Why it matters

Money paid toward rent goes into the pockets of your landlord. However, when you purchase your own home, a portion of your monthly mortgage payment, known as the principal, will allow you to build equity in your home. Later down the road you can borrow against the equity in your home to pay for renovations, college tuitions, weddings, debt, or anything else that you would like.  

Plus, a home actually has the potential to gain value as it’s paid off. Having this equity helps increase your overall net worth, helping you to cover unexpected expenses when they arise or achieve other goals such as purchasing your next home.

Calculating equity

Equity in real estate is fluid and is tied to the housing market. Equity is the difference between the fair market value of the property and the amount still owed on its mortgage and other liens. If you’re interested in learning the amount of equity you have in your home, you can request this information from your real estate agent and lender. 

How to build equity
  • Down payment: Homeowners who make larger down payments on their homes, or have been in their homes longer, tend to have more equity built up. 
  • Mortgage payments: As you continue to pay off your mortgage’s balance, each payment applied towards the principle increases your equity.
  • Market appreciation: Real estate consistently appreciates in value, making it one of the best investments you can make. The market saw rapid growth during the COVID-pandemic as rates were low and buyers outnumbered available homes. However, even with the cooling of the market post-pandemic, the latest Homeowner Equity Insights from CoreLogic reports the average homeowner’s equity grew by $34,300 in the past year.
  • Home improvements: Minor improvements and remodels could increase your equity, such as landscaping, and bathroom and kitchen remodels. 
Tapping into your equity

Considering selling? You can use the equity in your current home to cover the down payment on a new home. Speak to one of our loan officers about possible ways to achieve this. It is probably easier than you think. 

Looking to make some needed home improvements, consolidate debt, add a pool in the backyard, pay for tuition, or take that out-of-country dream trip? Depending on your current situation, accessing money from your home's equity in a cash-out refinance could be a valuable tool to help you achieve your short or long-term financial goals. In a cash-out refinance, you can access the equity in your home in a lump sum payout in exchange for a larger mortgage. The amount of cash you can pull out depends on the current value of your home and how much you owe on your mortgage. That's why, to qualify for a cash-out refinance, you need to have a certain amount of equity in your home to pull from. Typically, lenders want you to keep at least 20% equity in your home.

Refinancing an existing loan may result in finance charges being higher over the life of the loan. Reduction of payments may reflect a longer term.