Equity is a Useful Asset
The real estate market has been red hot. This is true almost everywhere in the nation, but has been particularly true in Massachusetts. In spite of fears about the pandemic, home prices have continued to rise. This is great news for everyone who has been looking to sell their home. Home prices have gone through the roof due to low inventory and rising demand. Demand has increased because of low interest rates and desire for more space. This formula has been fantastic for anyone selling their home. Interestingly enough, it has also been fantastic for homeowners who don’t want to sell their home. The rising prices increased home values across the board and is leaving homeowners flush with equity. This is great news for homeowners. The team at Peoples Choice Mortgages wants to help you understand why equity is a useful asset and you should be jumping for joy.
The Basics of Home Equity
Home equity is the difference between the value of your home and how much you still owe on your mortgage. Assuming your home value stays the same, as you make payments on the principal of your mortgage, your equity rises. However, it is possible for your equity to increase without paying down your principal. Even if the amount you owe on your mortgage stays the same, your equity can increase if your home value increases. This is exactly what is happening right now in the real estate market. As home values have skyrocketed this year, so has equity. Adding to this equity boom is the fact that many people have refinanced their mortgages to take advantage of historically low interest rates. This means that some have seen their equity rise on two fronts; increasing home values and decreases in the size of their mortgage.
Home Equity in the U.S. According to the Numbers
Home equity has been rising throughout the United States, but by how much? According to CoreLogic, year over year home equity has increased by about $620 billion. This is a 6.6% increase in overall home equity from last year. On average, in the last year alone homeowners have increased their home equity by $9,800. These numbers are national averages and some markets have done significantly better. In Montana, for example, the average home equity has increased $28,900 since last year. Those numbers are eye-popping!
Benefits of Increased Home Equity
If you are a homeowner and have seen your equity increase over the past year, then you are in luck. There are many reasons why home equity is a useful asset.
Purchasing a New Home
One of the many benefits of having equity in your home is the ability to purchase a new home. The pandemic has changed the needs of many homeowners. A house is no longer a place where we sleep. For many, it is also where we work or attend school. This has led many families to look at buying a larger home with more space to accommodate all of the new demands on their house. Many have been able to leverage the equity from their current home to help them afford the larger home they desire. Low interest rates means that now is the right time to use equity and purchase a home that better fits your needs.
Building Generational Wealth
Home equity is an asset and you can pass it down to future generations just like you would other assets. Increasing your equity can increase your net worth, which can benefit your kids or other relatives. First, if you pay off the mortgage on your home, you can then pass that on. Second, even if you do not pay off your home, your kids can take advantage of the equity you have built up.
Owning a home provides you a great way to build up financial wealth, especially compared to renting. On average, homeowners have 40 times the networth of those who rent. There are a couple of main reasons for this.
First, your home is an asset that appreciates over time. Even if the market has dips and your home value decreases, eventually, it will gain back its value. Not even the Great Recession of 2008 could keep home values low forever.
Second, mortgages act as a kind of forced savings account. Whenever you make a payment on your mortgage, part of your payment goes toward interest and the other goes toward your principal. The more you pay down on your principal, the more your equity increases. Being forced to make a mortgage payment each month forces you to contribute to your savings in the form of equity.
Final Thoughts
No matter how you slice it, purchasing a home is a great way to impact your financial future. Building equity makes this especially true since you do not need to own your home outright in order to accrue financial benefits. If you want to help your financial future for generations to come, it might be time to look into whether or not purchasing a home is right for you. Even if you think you aren’t ready to purchase a home, you should reach out to a mortgage professional.
At Peoples Choice Mortgage, we are here to give you all the facts about your current financial situation. We will let you know whether or not you can qualify for a mortgage. If you can’t, then we can help you get started on a financial path that will help you qualify in the future. There are a large number of government programs and a wide variety of lenders that might make your dream of owning a home closer to reality than you think.