How to Have Options Through Your Home Equity
How to Have Options Through Your Home Equity
Owning a home is one of the best ways to invest in your financial future, especially as your home equity grows. How does one have options through your home equity? When you first purchase a home, the amount of the downpayment is your equity. Over time, that equity grows. Some people call it forced, but I see the building of home equity as a form of automatic savings. This can work to your benefit as the value of your home increases. And if you have a fixed interest rate, your payments remain the same for the life of the loan.
Across the country, home equity was increasing before the health issues swept our nation, and it continues to grow throughout the year, giving sellers powerful options in this market. So many people are made wealthy through the power of real estate. And surprisingly, it can be very affordable.
According to the just-released Q2 Homeowner Equity Insights Report by CoreLogic:
“U.S. homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of nearly $620 billion since the second quarter of 2019, an increase of 6.6%, year over year.”
Dr. Frank Nothaft, Chief Economist for CoreLogic, views much of the equity growth to rising home prices:
“The CoreLogic Home Price Index registered a 4.3% annual rise in prices through June, which supported an increase in home equity.”
CoreLogic also states that home equity is increasing in every state:
“In the second quarter of 2020, the average homeowner gained approximately $9,800 in equity during the past year.”
What Does This Mean for Sellers?
When equity is rising, as it is today, you may have more invested in your home than you realize. Mark Fleming, Chief Economist at First American, notes:
“As homeowners gain equity in their homes, they are more likely to consider using that equity to purchase a larger or more attractive home – the wealth effect of rising equity. In today’s housing market, fast rising demand against the limited supply of homes for sale has resulted in continued house price appreciation.”
Other options for equity use is to fix up your home. Make the changes you’d like to see.
Other options are to pay off debts or assist in a child or grandchild’s education. Just remember though, if you use that equity, you’ll need to pay it back. It doesn’t come free. To use the equity (other than by selling and getting another home), one gets a loan and the bank will use your home as collateral. The loan needs to be paid back. So before you think about getting the money out of your home, analyze whether your income can pay for the costs of the loan.
On the other hand, if you have, for example, an $800,000 home that has appreciated to say, $1,000,000, that extra $200,000 can be used to upgrade to a new home. Or, you can downsize and keep the money. Talk to your accountant about tax savings or payments. There are other ways to get a dream home by making use of the rise in equity and not make any payments on that loan, just paying taxes, insurance, and HOA if any. As always, certain conditions apply, but you may be eligible. See my blog Affording That Dream Home .
Another option is to use the equity in your home to build another unit ADU, Accessory Dwelling Unit, on the property. This could be making the garage into a studio apartment. Then rent it out and use the income to pay off the ADU and use the money for retirement, travel, leaving a legacy, etcetera. First, though, we’ll need to analyze the codes, cost of construction and your potential return on investment.
Remember playing Monopoly? The concept is to acquire homes and then trade up. Not so different from real life. I helped clients purchase a home. They jointly saved and with their increased equity, they were able to buy another home that already had an ADU on it. One of the properties was used for income and the other to live in. Now they are looking at getting a third property. This is increasing their equity through their automatic savings and leaving a legacy for the family and the heirs.
For more information, please reach out to me and I’m happy to answer your questions and provide options.