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Why Home Equity Matters for Building Wealth

Anyone can build wealth, and one of the best ways to do it is with the equity in your home. We’ll show you how!

a house for sale with a for sale sign

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If you’re interested in learning more about home equity, then chances are you’re working towards purchasing your first house, or have just purchased it. Not only is homeownership a dream of many people, it’s also one of the best ways you can build wealth for you and your family. Using the equity that builds up in your house over time is a great way to make improvements on your property, build wealth, or pay off high interest debt.

But how do you get home equity and what are some ways to build more of it at a faster pace?

In this article, we’re going to discuss the following topics:

  • What home equity is and how it relates to wealth
  • How to build more home equity and greater wealth

What is home equity and how does it relate to wealth?

The first step to building wealth starts with your home

home with a for sale sign in yard
Purchasing a home is a great idea if you want to build wealth. Image courtesy of the New York Times.

One of the best parts of becoming a homeowner is that you finally have a place of your own, and can make improvements as you see fit. While homes might cost more upfront as opposed to renting, knowing that each month you’re contributing towards building your wealth is a great feeling. Homes offer a sense of stability that renting can’t match, and are a great way to inspire others to reach for their own homeowner goals.

As a new homeowner, you’re paying your mortgage every month, but did you know that with those payments you’re also building your equity? As you continue to pay off your principal and interest each month, you’re increasing your home equity in the process. Home equity is defined as the portion of your home that you’ve paid for and now own. How much you have is determined by the value of your home and the balance that you still owe on your mortgage. So if you took out a mortgage for $200,000 and have chipped away for years and now you owe $150,000 on your mortgage, you would have $50,000 in home equity. 

In addition to your equity increasing over time as you keep paying your mortgage, homes also tend to appreciate over time, unlike other large purchases like a car. Property values usually increase the longer you stay in your home, which can also boost your home equity. 

Building equity is a long process, which takes place over years. It’s a steady and stable way to build wealth, but it does take time. While the wealth you’re building may not be immediately accessed, it is there and can be used when the time comes. Building equity is important for homeowners because it is one of the best ways to build wealth that you can not only use now, but pass on to future generations. Equity boosts your net worth and is essential if you want to make large improvements or upgrades on your property.

When you choose to tap into your home equity, it should only be for projects or purchases that will create more value for your home. Because your house is used as a collateral, you want to make sure that anything you use if for will only benefit you or future homeowners such as a kitchen/bathroom remodel, landscaping design, or adding a deck or patio. 

If you you do decide to use your home equity for an upgrade or an improvement to your home, you can typically access funds through:

  • Home equity loan. This allows you to borrow up to (usually) 80% of your home’s worth as one lump sum and then pay it back over a set period of time, such as 10 or 15 years depending on the terms you agree to with your bank.
  • Home equity line of credit. You can also borrow as needed with a HELOC, which allows you to take out only what you need, then pay it back. This line of credit can be susceptible to adjustable interest rates.

You will also gain access to your equity when you choose to sell or refinance. When you sell, depending on how much you’ve already paid on the mortgage, the equity you built would come back to you based on how much you sold it for. So if you paid your $200,000 mortgage and sold the house for $300,000, you would walk away with $100,000 that you could use towards another house.

Refinancing also allows you to access your wealth allowing you to take out some of the accrued equity. When you refinance it is typically because there is a lower interest rate, which may even allow you to keep your monthly payment the same on your mortgage.

Having equity is important because it allows you to:

  • Renovate or upgrade your home
  • Buy additional property
  • Consolidate high interest debt to pay it off faster
  • Have access to emergency money for unexpected situations

How to build more home equity (and greater wealth)

What are some tips for building more home equity?

family of four in front of their home
There are additional ways to increase your home equity and build wealth. Image courtesy of Public Policy Institute of California.

If you’re a homeowner and looking to create wealth not only for yourself, but for future generations, you’re already on the right path! Making sure you pay your mortgage each month is one of the best ways to slowly and surely build wealth. Additionally, you could also try:

  • Making extra mortgage payments. Even if it’s just a little extra each month, this will help you pay down your principal faster.
  • Consider refinancing. When you refinance, it’s usually to a shorter loan term. This means your payments are higher for a shorter period of time, allowing you to pay down principal and pay less interest in the long run.
  • Completing home value projects. Using your home equity to complete a remodel or upgrade is a great way to add value to your home and increase equity.

Looking for more tips like this on how to increase your wealth through real estate? Urban Real Estate Center has all the tools to help you, whether you are a commercial or residential realtor into taking your real estate business to the next level.

Building wealth is something all homeowners can do when they’re paying their mortgage on time. Equity allows you to not only increase your own financial worth, but ensure your family has access to that wealth as well. 

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December 29, 2022
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