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Buying Myths

The Importance of Home Equity in Building Wealth

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Homeownership has always been the first rung on the ladder leading to household wealth. As Freddie Mac recently posted:

“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.

You can find what you owe on your mortgage by looking at your last monthly statement or by contacting your lender. If you need help determining the current market value of your home, contact a local real estate professional.

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.

As proof of this, First American broke down the net worth of homeowners and renters by income categories. Here are their findings:The Importance of Home Equity in Building Wealth | Simplifying The MarketOnly 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.

According to the latest Homeowner Equity Insights Report from CoreLogic, the average homeowner gained $17,000 in equity in just the last year. Here’s a breakdown of the year-over-year equity gain by state:The Importance of Home Equity in Building Wealth | Simplifying The Market

When can you cash in on your housing wealth?

Your home equity is part of your total wealth as a homeowner. The two most common ways homeowners can leverage their wealth are:

  • Selling
  • Refinancing

Selling: When you decide to sell your home, the equity you’ve built over time will come back to you in the sale. For example, if you paid off your $200,000 mortgage and sold your home for $350,000, you would receive $150,000 after closing.

Refinancing: You can refinance your current mortgage and take out some of the equity you have accumulated. With today’s historically low mortgage rates, you may be able to take out substantial cash and keep your monthly payment the same. Thankfully, homeowners today are doing this responsibly and not repeating the same mistakes made in 2006-2008 when some cashed out their entire equity to purchase luxury items like new cars, lavish vacations, etc.

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.”

What might the future bring?

Most experts are calling for home prices to continue appreciating going forward. The Home Price Expectation Survey, a survey of a national panel of over one hundred economists, real estate experts, and investment & market strategists, indicates appreciation will continue for at least the next five years. Using their annual projections, the graph below shows the equity build-up a purchaser would potentially earn by buying a $300,000 home this January:The Importance of Home Equity in Building Wealth | Simplifying The Market

Bottom Line

Home equity, for most Americans, is the quickest way to build household wealth. That wealth gives homeowners more options during good times and in difficult situations.

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Buying Myths

The First Step: Getting Pre-Approved for a Mortgage [INFOGRAPHIC]

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Buying Myths

Why You Want an Agent’s Advice for Your Move

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No matter how you slice it, buying or selling a home is a big decision. And when you’re going through any change in your life and you need some guidance, what do you do? You get advice from people who know what they’re talking about.

Moving is no exception. You need insights from the pros to help you feel confident in your decision. Freddie Mac explains it like this:

“As you set out to find the right home for your family, be sure to select experienced, trusted professionals who will help you make informed decisions and avoid pitfalls.”

And while perfect advice isn’t possible – not even from the experts, what you can get is the very best advice out there.

The Power of Expert Advice

For example, let’s say you need an attorney. You start off by finding an expert in the type of law required for your case. Once you do, they won’t immediately tell you how the case is going to end, or how the judge or jury will rule. But what a good attorney can do is walk you through the most effective strategies based on their experience and help you put a plan together. They’ll even use their knowledge to adjust that plan as new information becomes available.

The job of a real estate agent is similar. Just like you can’t find a lawyer to give you perfect advice, you won’t find a real estate professional who can either. That’s because it’s impossible to know everything that’s going to happen throughout your transaction. Their role is to give you the best advice they can.

To do that, an agent will draw on their experience, industry knowledge, and market data. They know the latest trends, the ins and outs of the homebuying and selling processes, and what’s worked for other people in the same situation as you.

With that expertise, a real estate advisor can anticipate what could happen next and work with you to put together a solid plan. Then, they’ll guide you through the process, helping you make decisions along the way. That’s the very definition of getting the best – not perfect – advice. And that’s the power of working with a real estate advisor.

Bottom Line

If you’re looking to buy or sell a home, you want an expert on your side to help you each step of the way. Connect with a real estate professional so you have advice you can count on.

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Buying Myths

The Truth About Down Payments

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If you’re planning to buy your first home, saving up for all the costs involved can feel daunting, especially when it comes to the down payment. That might be because you’ve heard you need to save 20% of the home’s price to put down. Well, that isn’t necessarily the case.

Unless specified by your loan type or lender, it’s typically not required to put 20% down. That means you could be closer to your homebuying dream than you realize.

As The Mortgage Reports says:

“Although putting down 20% to avoid mortgage insurance is wise if affordable, it’s a myth that this is always necessary. In fact, most people opt for a much lower down payment.

According to the National Association of Realtors (NAR), the median down payment hasn’t been over 20% since 2005. In fact, for all homebuyers today it’s only 15%. And it’s even lower for first-time homebuyers at just 8% (see graph below):

a graph of a number of blue squares

The big takeaway? You may not need to save as much as you originally thought.

Learn About Resources That Can Help You Toward Your Goal

According to Down Payment Resource, there are also over 2,000 homebuyer assistance programs in the U.S., and many of them are intended to help with down payments.

Plus, there are loan options that can help too. For example, FHA loans offer down payments as low as 3.5%, while VA and USDA loans have no down payment requirements for qualified applicants.

With so many resources available to help with your down payment, the best way to find what you qualify for is by consulting with your loan officer or broker. They know about local grants and loan programs that may help you out.

Don’t let the misconception that you have to have 20% saved up hold you back. If you’re ready to become a homeowner, lean on the professionals to find resources that can help you make your dreams a reality. If you put your plans on hold until you’ve saved up 20%, it may actually cost you in the long run. According to U.S. Bank:

“. . . there are plenty of reasons why it might not be possible. For some, waiting to save up 20% for a down payment may “cost” too much time. While you’re saving for your down payment and paying rent, the price of your future home may go up.”

Home prices are expected to keep appreciating over the next 5 years – meaning your future home will likely go up in price the longer you wait. If you’re able to use these resources to buy now, that future price growth will help you build equity, rather than cost you more.

Bottom Line

Keep in mind that you don’t always need a 20% down payment to buy a home. If you’re looking to make a move this year, reach out to a trusted real estate professional to start the conversation about your homebuying goals.

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The information contained, and the opinions expressed, in these article are not intended to be construed as investment advice. Let's Talk Real Estate and Keeping Current Matters, Inc. do not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Let's Talk Real Estate and Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.