The Importance of Building Equity

The Importance of Building Equity

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Home ownership is, simply put, part of the American Dream. The idea is that homeownership creates a path for building wealth over time, helping you to create financial stability.  If you’re new to the game, or could use a refresher, we’re going to look at what this means exactly, and how it can enhance your net worth. 

 

First and foremost: What is home equity?
 

Home equity is the current market value of your home, minus what you owe. Ideally, you’re looking for a positive number here. To estimate your equity, you can subtract your mortgage balance from the market value of your home. 

 

Next: How does it work?
 

Building home equity is a slow climb. Depending on which state you live in, year-over-year home equity gain can vary from low thousands all the way up to $30k. Here in Colorado, we average at about $18k, however the mountain/resort areas that we specialize in definitely help bring that average up. Home equity is essentially a long-term strategy for building wealth, using mortgage payments to reduce what you owe, while your home gains value. This is often referred to as a “forced savings account”. 

Homeowners expect to see the value of their home rise over time, however there is a flip side to this equation.  Your equity can fall, too, if your home’s value drops at a rate faster than that which you are paying your mortgage’s principal balance.

To build home equity, there are a number of ways you can assist in its growth. First, coming up with a large down payment is the fastest, but not always easiest or most viable path, to accruing equity.  Additionally, and more realistically for most homeowners, simply focus on paying off your mortgage, especially by paying more than the minimum suggested amount.  Other longer term options are to stay in your home for 5 years or more, and to renovate all that you can. 

 

Finally: When can you cash in on your housing wealth?
 

Home equity is part of your total wealth as a homeowner.  There are two common ways in which homeowners can leverage their wealth: selling and refinancing.

In addition to these obvious ways to cash in, there are other ways to take advantage of your accrued home equity.  You can use equity to buy a new house, allowing for a larger downpayment and therefore, lower mortgage and lower monthly payments. You can also use equity for your retirement in a scheme that’s called “reverse mortgage”. 

 

Hopefully this was a quick and helpful rundown of that catchy “equity” term that gets tossed around so much, especially with first-time homebuyers.  As always, we are here to provide our expert knowledge, not only from our 30+ years in the real estate market, but specifically to the beautiful Summit County, Colorado area that we have called home for so many years. Please don’t hesitate to reach out with any questions or concerns - we are here to help you find the keys to your dream mountain home! 

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