Building Wealth Through Homeownership
Many have fallen into the mindset that they will never be able to own a home. They have the false assumption that homeownership is only for the upper echelon. People assume you need a top tier job or multiple years worth of income in a savings account to ever qualify. These assumptions are wrong and dangerous. Most people are closer to qualifying for a mortgage than they realize. Specialized loan programs and the large variety of available lenders mean that you might even be able to get a house right now, whether you realize it or not. A lot of people have this false belief that owning a home is never possible because of the wealth disparity between homeowners and renters. However, this disparity is misleading. The reason why this disparity exists is not because only those with wealth can buy homes. The truth is you build wealth through homeownership.
The Data on Wealth and Homeownership
The data on household wealth and homeownership is sobering. Many economists speak constantly on growing wealth inequality in the United States. One aspect of this rising inequality is the wealth gap between those who rent and those who own their own home. According to Dr. Ben Carson, former Director of Housing and Urban Development spent years highlighting this gap. He would often say that the typical homeowner is worth $200,000 compared to $5,000 for renters. However, in recent years, this wealth gap has only increased. The graph included in this post does a great job of showing how this inequality has only increased in the past few years. As of 2019 the average wealth of a homeowner is closer to $250,000 and the wealth of your average renter is about $6,000. That is a huge difference.
Which Comes First: Homeownership or Wealth?
Interpreting the data on the wealth gap between homeowners and renters is similar to figuring out whether the chicken or the egg came first. Did wealthy people buy homes, which is why homeowners now have higher levels of wealth than renters? Or, is it the other way around. Did people buy homes and suddenly improve their wealth? This situation is much easier to figure out than the chicken or the egg; almost always, owning a house came before they acquired wealth. More importantly, owning a house helped them build wealth.
For many Americans, a home is the largest asset they will ever own or purchase. The average value of a home in the United States was around $355,000 as of December, 2020. In many markets, that is a lot more. In Boston, the average home value as of December, 2020 was $635,000. The great part is that you do not need to wait until you are done paying off your home in order to benefit from wealth building. This starts as soon as you make a few payments.
Many people make the mistake of thinking about a mortgage as being in debt. While it’s true that a mortgage is a loan on your home and you owe every bit of it, it starts to become an asset. When you make payments on your mortgage a portion of your payment goes toward the interest on the loan and another portion goes toward the principal. As you start to pay down the principal on your mortgage, the total amount that you owe decreases. Once the principal on your mortgage drops below the value of your house, you have an asset. That asset is equity.
Equity is one of the most important assets you will ever have and is usually the first one that will kickstart your wealth building. The great part about today’s real estate market is that you do not have to wait long after buying a home to build equity. Home values increased over 8% from December, 2019 to December, 2020. This pretty much means that as long you purchased a home before 2020 or sometime during 2020, you saw your home value increase. As a result, you probably saw your equity increase. This was a wealth boon for homeowners and the same will probably be true for 2021.
Today’s rock bottom mortgage rates are keeping the demand for new homes really high. However, the inventory of available homes to purchase is very small. This is creating a situation where home prices are continuing to increase. Basically, there is a very good chance that if you purchase a home in the near future, you will see its value increase over the next year as well.
Equity is not just a paper tiger. It is a real asset that can make a tangible difference in your life. You can tap into your equity to do elaborate remodels to your home. You can take out a line of credit on your equity to pay for unforeseen emergencies. You can even use equity to help you afford a larger home or a new property. Equity is wealth you can use to protect your wealth and help you grow more.
Final Thoughts
Owning a home can change the financial fortunes of you and every generation that comes after you. For many, it is the first step to building wealth. What is important to keep in mind is that most homeowners do not start out with wealth. They start out in a similar situation to the renters in the graph up above. It was only through owning a home that they built their wealth. They went from renters to homeowners because they didn’t just accept the myth that buying a home is only for the wealthy. They made the bold choice of not just assuming that they wouldn’t qualify for a mortgage.
If you are renting, you shouldn’t make the same mistake and think that owning a home is beyond your means. You are probably much closer to owning a home than you realize. At Peoples Choice Mortgage we go to the mattresses for our clients to do everything possible to own a home. It might not be today, but with some planning and commitment, that day will be here sooner than you imagined. We work with over 700 lenders, so we have many different loan options to choose from to find the perfect one for your current financial situation. Additionally, first time homebuyers can take advantage of special programs like FHA Loans or down payment assistance programs.
The bottom line is that you shouldn’t disqualify yourself from owning a home before you ever speak with an independent mortgage broker. Our mission is to help our clients’ dreams of owning a home become a reality. Contact us today, so that we can start working on your dream right away.
