Why Homeownership is an Important Wealth Building Factor
- Homeownership is a tool used to build (generational) wealth.
- Leveraging equity in your home can bring about financial stability.
- When you are aware of your net worth, you can financially prepare to meet your needs and wants as an aspiring or current homeowner.
Homeownership is an essential wealth-building tool. Below will explain how homeownership can build wealth for almost anyone and how to start your journey to homeownership.
A homeowner has a significant chance to build equity in their home. Equity is the difference between the balance owed on your home and the home's current value.
A recent survey by CoreLogic showed the average equity gained by homeowners for Q1 in 2022 was greater than $216,000. The total equity gained was close to $1.9 trillion.
Owning a home is like having a savings account outside your bank account. Home equity can be converted into liquid cash upon refinancing.
One major benefit of a home equity loan is that the interest rates are significantly less than interest rates on other types of loans and credit cards. Owning a home also helps you save on taxes yearly, as you can write off the interest.
There are several ways a homeowner can build equity in their home which include:
- Increasing the amount of your down payment.
- Increase your mortgage payment amount (or pay your mortgage more frequently).
- Refinance your home to shorten your mortgage loan term.
- Invest in your home by remodeling it.
- Historically, real estate increases with value over time, even through ups and downs in the housing market.
Recommended Read: Nine Key Steps to Buying a Home
Build (Generational) Wealth
Homeownership helps to create wealth for you and generational wealth for your family.
Generational wealth is when you have assets or money to pass down to your children and your descendants (your children, grandkids). So yes, generational wealth is about passing down money, but sharing financial knowledge and good financial habits are just as important.
For example, if you list in your estate plan that you want your child to have your home, yes, they may have a financial advantage, but if they don’t know how to take care of their assets, they will make poor financial decisions.
As you continue to educate yourself about money, help others around you (family and friends) to learn about money. The knowledge you gain will help you in the future when you are handling your finances. It’s never too late to learn, and it’s never too early to start teaching the younger generation.
CapWay Pro Tip: Download CapWay’s mobile app today to help you learn about money while on the go.
Recommended Read: Why You Need a Trust to Pass on Generational Wealth
Increase Your Net Worth
Net worth is the difference in the value of the assets you own and the debt you owe.
There is a significant difference in net worth for renters and homeowners. The Federal Reserve states that the net worth of a homeowner compared to a renter is 40 times greater. The survey showed that homeowners had a median net worth of $255,000 compared to renters, who had a median net worth of $6,300.
Paying down the balance on your home increases the equity, which increases your net worth. A positive net worth calls for a positive financial future, while a negative net worth means that your financial journey needs attention.
When you write down your financial goals, you can clarify what you want and what steps you need to take to get there. For example, if you owe student loan debt and your goal is to become debt-free, then you must write down your goal and create a step-by-step plan.
CapWay Pro Tip: CapWay has many resources to help you create a financial plan, pay off debt, and achieve financial freedom.
Write your financial goals down monthly and visit them at least once weekly to ensure that you are on the right track. Pay attention to detail and give yourself a timeline. Stay encouraged with your goals and spend time around like-minded people who are working toward the same goals as you. This will help make it easier for you to make smart decisions.
The Money Wrap-Up
Although the Federal Reserve has continued its interest rate hikes, homeownership is still a promising tool to assist you in building wealth.
Interest rates have to increase, often for a short period, to balance the economy and fight against inflation. The increase in interest rates can benefit you in other areas of your life, such as your savings account.
The interest rates have been slim to none regarding money sitting in the bank. The rate increase will increase your annual percentage rate as well. This will help to grow your money faster than before.
What this means for current homeowners is that if you have an adjustable-rate mortgage, you will see an increase in your monthly payment amount. For future homeowners, mortgage rates will be significantly higher than they have in the past, making the price of homes less affordable.
As a current homeowner, you can leverage the equity you currently have in your home to pay down any debt you owe. If a home loan is your only debt, use the equity to build a savings account or start other investment ventures.
The thought of owning a home and building wealth is exciting. But you must be financially prepared before you start the long process of buying a home. If you can’t afford a home with the current interest rate hikes, allow the economy enough time to balance out.