The Importance of Home Equity in Building Wealth
“Homeownership has cemented its role as part of the American Dream, providing families with a place that is their own and an avenue for building wealth over time. This ‘wealth’ is built, in large part, through the creation of equity… Building equity through your monthly principal payments and appreciation is a critical part of homeownership that can help you create financial stability.”Home equity is the difference between the current market value of your house and the amount you currently owe on your mortgage. To estimate your equity, subtract your mortgage balance from the market value of your home.
Is Homeownership Truly a Better Path to Wealth Than Renting?Some argue that renting eliminates the cost of property taxes and home repairs. Every potential renter must realize that all the expenses the landlord incurs (property taxes, repairs, insurance, etc.) are already baked into the rent payment – along with a profit margin. You don’t save money by renting.
Only one income category ($127-192K) has a higher net worth for renters over homeowners. Every other category shows that being a homeowner leads to greater accumulated wealth.
When Can You Cash in on Your Housing WealthYour home equity is part of your total wealth as a homeowner. The two most common ways homeowners can leverage their wealth are:
How Can These Options Help Homeowners??During these difficult times, many households are struggling with their housing expenses. Homeowners, because of their equity, have better alternatives. Odeta Kushi, Deputy Chief Economist at First American, recently explained that homeowners financially impacted by the pandemic will not necessarily be faced with foreclosure:
“The foreclosure process is based on two steps. First, the homeowner suffers an adverse economic shock…leading to the homeowner becoming delinquent on their mortgage. However, delinquency by itself is not enough to send a mortgage into foreclosure. With enough equity, a homeowner has the option of selling their home, or tapping into their equity through a refinance, to help weather the economic shock.”