What Does Home Equity Mean for Buyers and Sellers in 2021?
June 14, 2021
For Buyers & Sellers
Real estate isn't just about having somewhere to live in the present — it's also about investing in your financial future. In fact, it's been said that owning your own home is one of the biggest steps you can take to start building wealth.
When it comes to building wealth through real estate, one of the most important concepts to understand is home equity. Let's explore the crucial topic of equity — what it means, how you can build it, and what kind of advantages it offers homeowners in the long-term.
Understanding Home Equity
Put simply, an owner's equity is their interest in their home. You might think of home equity as the amount of a home's value that you own, and which is not held by your mortgage lender or bank as an outstanding loan. One way to illustrate equity is with an example. Let's say that a buyer purchases a $300,000 home with a 20 percent downpayment ($60,000), and takes a loan for the remaining $240,000. In this case, the new homeowner's immediate equity would be the 20 percent they paid, or $60,000. This is the dollar value amount of the home that they truly "own," so to speak; their bank or mortgage company owns the rest. An easy calculation to determine your equity is to subtract your loan balance from the value of your home. So, let's say that as time goes on, our homeowner pays enough that they now only owe $100,000 on their loan. That would make their equity in the home $200,000. Now, over that same period, it's important to keep in mind that the value of the home is going to change, as market factors drive home prices up or down. This will also affect the amount of equity that the homeowner has built. So, if the value of the home were to appreciate significantly, our homeowner's equity would increase as well. If the value of the home doubled, for example, our homeowner's equity would actually now be roughly $500,000, on their $600,000 home.How to Build Home Equity
Broadly speaking, the more equity a homeowner has in their property, the better. So, what does it take to build equity? Generally, there are two primary ways for homeowners to develop equity:- The homeowner pays down their loan and decreases the amount of debt they owe
- The value of the home appreciates with time
Decreasing Debt
When it comes to decreasing their debt, homeowners have a few options. The passive method is for homeowners to continue to make their monthly mortgage payments on time. With most standard amortized home loans, over time, each payment you make increasingly goes toward the principal on your loan, rather than the interest — meaning that, in time, you are contributing more and more to your equity, while making the same basic payment each period. There are also steps that homeowners can take to be more proactive, and decrease their debt more quickly. For instance, homeowners can typically pay extra each month, with the money they contribute beyond their necessary payment helping to pay down their principal sooner. In other cases, home buyers who want to build equity more quickly might even want to opt for shorter terms on their loan. For instance, you'll typically build equity faster with a 15- or 20-year fixed-rate mortgage, compared to a 30-year loan.Changes in Property Value
Homeowners also build equity when the value of their property increases. The passive method is to allow market factors to drive your home's value up over time. An important thing to remember? As writer Hal Bundrick points out for consumer information site NerdWallet, "building home equity is a slow climb." There can be significant variation in market trends from state to state — and even neighborhood to neighborhood — and appreciation may not always occur in a steady, linear climb. With that being said, homeowners may be able to take some active steps to increase the value of their home. For instance, performing certain home improvement projects with a high rate of return on investment (ROI) may help you bring up the value of your property. In some cases, performing updates and maintenance may be what it takes to maintain the value of your home on the market; by contrast, allowing your property to deteriorate could decrease your home's value, and minimize your equity.
Home Equity Snapshot
What have been the recent trends in home equity here in Chicagoland and across the country? The CoreLogic Homeowner Equity Insights report offers a look at trends through the fourth quarter of 2020. The report indicates that homeowners with mortgages saw their equity increase by a total of nearly $1.5 trillion from 2019 to 2020 — an increase of roughly 16 percent year over year. Locally, the average Illinois homeowner saw a roughly $17,000 gain in equity year over year; homeowners in the Chicago metro area saw a 6.1 percent annual increase.The Benefits of Building Equity
Building equity in your home can be an effective way to increase your wealth in the long-term. Owning a home is truly an investment. Home payments are sometimes called "forced savings," for this very reason. While you're making payments every month, you're also helping to increase the value of your investment asset, your home. You're building your wealth over time, with each and every payment you make. This long-term value is why home equity is so important. In essence, home equity is a financial asset, which homeowners can use in many different ways. With the right strategy in place, you can use the equity in your home to purchase your next property when it's time to move. In some cases, you can use home equity to help fund your retirement, or to pass on your wealth to your heirs. And, in other cases, home equity can act as an asset for you to borrow against. Home equity loans often offer lower interest rates and tax advantages, compared to some other types of loans. There are also different ways to access the funds from your home equity, including taking a loan as a lump sum payment, or opening a home equity line of credit (HELOC). Before taking any loan or opening a line of credit, it's important to be sure to do your research, and understand your potential fees, interest rates, and repayment terms. Remember that when you borrow against your equity, you're putting up your home as collateral.When Home Means More, You Need a Team With More to Offer
Home is about so much more than just four walls. Buying or selling a home is a big deal, and with everything we experienced in 2020, our homes have never been more important. That's why your local Baird & Warner agent is with you at every step of the way, from finding the perfect home to connecting you with local experts in mortgage and title. Whether it's the beginning of a story or the end of a chapter, we're here to help.Tags:
