The average homeowner has a net worth over 40 times greater than that of a renter. The difference is staggering and continues to widen. The simple truth is—owning a home is one of the most effective ways to build lifelong wealth. Even though values go up and down, appreciation in real estate values can bring in huge returns through what is known as home equity. So just what is home equity and why is it essential to building wealth? Let’s dive in:
What is home equity?
Home equity is the difference between what your home is worth versus how much you owe. So, let’s say you owe $200,000 on your home, and it is worth $270,000. That would mean you have $70,000 of home equity. It is important to note that if home values decreased, so would your home equity. It’s even possible to have negative equity, where you owe more money than the home is worth, although that does not happen often.
How do you gain equity?
Home equity can be gained in a couple of ways. As home values increase, you gain equity. You also gain equity by paying down your principal mortgage balance, increasing the difference between the amount owed and the amount the home is worth. Another way to gain equity is by increasing your home’s value. Various home renovation projects like a kitchen remodel, adding a bedroom or finishing a basement can add value to your home. Be certain to consult with a real estate professional before starting any home remodeling projects. They can help you determine the right projects that will add value to your home and give you the best return on investment. This is especially important if you’re planning to sell your home after renovating, and even more so when selling your home in a seller’s market.
What can you do with equity?
Since home values have exploded in the last year, homeowners may be wondering how to get their hands on some of this wealth they’ve been building. There are two primary ways you can access your home’s equity; selling and refinancing. When you sell your home, as long as it is your primary residence and outside the capital gains limitations, the equity is yours to keep tax-free. Keep in mind you must have occupied your home and owned it for at least two years consecutively before you can sell tax-free. When refinancing your home, you are essentially taking out a loan based on your home equity. If you have $100,000 worth of equity, you can refinance to get that in cash. However, you will have to pay back that amount plus interest. Refinancing, when used properly, can be a great move. Another reason someone might want to refinance is to get a better interest-rate, but keep in mind there are costs associated with refinancing that are usually wrapped into the loan that will be repaid.
On the other hand, you could leverage your home equity and invest in something else with the hopes of it growing even more. Many real estate investors get started by using the equity from their primary residence to purchase another home as a rental property or a fix-and-flip. It’s important to discuss your options with a real estate professional before making the decision to refinance, especially if you’re looking into real estate investment.
Another way to access equity is a home equity line of credit, or HELOC. Contact our team to find out if a HELOC is a good option for you.
Ready to start building wealth?
If you’re currently renting and are ready to purchase a home of your own, our experienced team at Dream Homes by Jen is here to help. We will work with you to find a home that fits your needs and your budget, putting you in the best position to start building wealth. Contact us today and let’s get you started on the road to homeownership!