Homeownership has been part of the national way of life for decades and despite any downswings in the real estate market, consumers still long to own their slice of the American Dream. Historically, homeownership has been one of the surest paths to building long-term wealth and according to Federal Reserve Board statistics, once equity is built, a homeowner’s net worth is 46 times that of a renter’s.
Between closing costs, down payment amounts and other expenses, the initial act of buying a home can be incredibly costly and for most home buyers, making a home purchase is the largest expense they will make in their lifetime. Because of the large amounts of money needed to finance the purchase of a home, chances are that a mortgage provided by a lender will be needed to foot the bill. Until the home loan debt is fully paid off, the mortgage provider will be the primary lien holder on a property, but once the home is paid off in full, the home owner will earn the privilege of having 100 percent equity in their purchase.
What is Equity
According to mortgage rate origination tool, Mortgage Marvel, home equity is "An owner's financial position in a property. Equity is the difference between the property's value and the amount that is owed on mortgages." Equity is based on the monetary difference between the current market value of a home versus the total amount due on the mortgage.
Regardless of if you are a homeowner who has purchased a unit in a condominium community, single family detached home or even a townhouse, it is possible to build equity in the property. The one exception to the rule applies to New York residents who buy cooperative units. Typically, a loan not primarily classified as a mortgage is needed to fund the purchase of coops as in this living arrangement, individuals own shares of a corporation, as opposed to physically owning property.
Benefits of Building Home Equity
Building home equity is a long process that requires dedication from the primary loan holder. In the very beginning of a fixed rate mortgage, payments made by borrowers are generally applied to the interest charged on the loan with the smallest fraction be applied to the principal balance. As more payments are made, the balance of debt distribution switches and over time, greater sums of money will be applied directly to the principal, thus building more equity in the purchase. Building equity provides a multitude of benefits including:
- Building Long Term Wealth: Unlike renting, each mortgage payment does help fund a nest-egg in the form of home equity and consumers can tap into that acquired wealth by either selling the home or taking out a loan against the equity built.
- Goal Actualization: While instant gratification is an American way of life, committing to a goal of building home equity can fill a person with pride.
- Build a Line of Credit: Once equity in a home has been established, those in financial need can tap into that money via a home equity loan. Typically home equity loans will provide consumers a lower loan interest rate than a personal loan would charge.
- Retirement Funding: Experts advise consumers to view a home purchase as a long-term strategy, not a short-term investment. With that in mind, more people are choosing to age in place and a reverse mortgage can provide them with retirement funds while keeping a roof overhead. More people are choosing to age in place and live in their homes until the bitter end. A reverse mortgage is another type of home loan, but this one is reserved for aging Americans.
- Eliminate the Need for Private Mortgage Insurance (PMI): Lenders are always concerned about maintaining their investments and home buyers who put down less than 20 percent on a home purchase, will be required to take out Private Mortgage Insurance. As a consumer builds more worth in their home, that type of coverage will no longer be a required expense.
