Homeownership offers many advantages over renting, including a stable living environment, predictable monthly payments, and the freedom to make modifications. Neighbourhoods with high rates of homeownership have less crime and more civic engagement. Additionally, studies show that homeowners are happier and healthier than renters, and their children do better in school.
But one of the biggest perks of homeownership is the opportunity to build wealth over time. Researchers at the Urban Institute found that homeownership is financially beneficial for most families, and a recent study showed that the median net worth of homeowners can be up to 80 times greater than that of renters in some areas.
So how does purchasing a home help you build wealth? And what steps should you take to maximize the potential of your investment? Find out how to harness the power of home equity for a secure financial future.
WHAT IS HOME EQUITY?
Home equity is the difference between what your home is worth and the amount you owe on your mortgage. So, for example, if your home would currently sell for $600,000, and the remaining balance on your mortgage is $450,000, then you have $150,000 in home equity.
$600,000 (Home’s Market Value)
- $450,000 (Mortgage Balance)
$150,000 (Home Equity)
The equity in your home is considered a non-liquid asset. It’s your money; but rather than sitting in a bank account, it’s providing you with a place to live. And when you factor in the potential of appreciation (see my latest market report STATS), an investment in real estate will likely offer a better return than any savings account available today.
HOW DOES HOME EQUITY BUILD WEALTH?
A mortgage payment is a type of “forced savings” for home buyers. When you make a mortgage payment each month, a portion of the money goes towards interest on your loan, and the remaining part goes towards paying off your principal, or loan balance. That means the amount of money you owe the bank is reduced every month. As your loan balance goes down, your home equity goes up.
Additionally, unlike other assets that you borrow money to purchase, the value of your home generally increases, or appreciates, over time. For example, when you pay off your car loan after five or seven years, you will own it outright. But if you try to sell it, the car will be worth much less than when you bought it.
However, when you purchase a home, its value typically rises over time. So when you sell it, not only will you have grown your equity through your monthly mortgage payments, but in most cases, your home’s market value will be higher than what you originally paid.
And even if you only put down 10% at the time of purchase—or pay off just a small portion of your mortgage—you get to keep 100% of the property’s appreciated value, tax-free as your prime residence. That’s the wealth-building power of real estate.
WHAT CAN I DO TO GROW MY HOME’S EQUITY FASTER?
Now that you understand the benefits of building equity, you may wonder how you can speed up your rate of growth. There are two basic ways to increase the equity in your home:
1) Pay down your mortgage.
We shared earlier that your home’s equity goes up as your mortgage balance goes down. So paying down your mortgage is one way to increase the equity in your home.
Some homeowners do this by adding a little extra to their payment each month, making one additional mortgage payment per year, or making a lump-sum payment when extra money becomes available—like an annual bonus, gift, or inheritance.
Ideally, you'd ask your bank to set up your payments to be every 14 days... that way you make 26 payments a year instead of 24. You can often add an extra 10-20% of your normal payment to lower the amount of your mortgage each year at an even faster rate.
Before making any extra payments, however, be sure to check with your mortgage lender about the specific terms of your loan. Most mortgages have either lump sum or bi-weekly prepayment limits without incurring any penalties. And it’s important to ensure that if you do make additional payments, the money will be applied to your loan principal.
Another option to pay off your mortgage faster is to decrease your amortization period. For example, if you can afford the larger monthly payments, you might consider changing from a 25-year to a 20- or 15-year amortized mortgage when you renew for the first time. Not only will you grow your home equity faster, but you could also save a bundle in interest over the life of your loan.
2) Raise your home’s market value.
Boosting the market value of your property is another way to grow your home equity. While many factors that contribute to your property’s appreciation are out of your control (e.g. demographic trends or the strength of the economy) there are things you can do to increase what it’s worth.
For example, many homeowners enjoy do-it-yourself projects that can add value at a relatively low cost. Others choose to invest in larger, strategic upgrades.
Keep in mind, you won’t necessarily get back every dollar you invest in your home. In fact, according to Remodeling Magazine’s latest Cost vs. Value Report, the remodeling project with the highest return on investment are kitchens and bathrooms and even flooring in a condo suite.
Of course, keeping up with routine maintenance is the most important thing you can do to protect your property’s value. Neglecting to maintain your home’s structure and systems could have a negative impact on its value—therefore reducing your home equity. So be sure to stay on top of recommended maintenance and repairs.
HOW DO I ACCESS MY HOME EQUITY IF I NEED IT?
When you put your money into a checking or savings account, it’s easy to make a withdrawal when needed. However, tapping into your home equity is a little more complicated.
The primary way homeowners access their equity is by selling their home. Many sellers will use their equity as a downpayment on a new home. Or some homeowners may choose to downsize and use the equity to supplement their income or retirement savings.
WE’RE HERE TO HELP YOU
Wherever you are in the equity-growing process, we can help. We work with buyers to find the perfect home to begin their wealth-building journey. We also offer free assistance to existing homeowners who want to know their home’s current market value to refinance or secure a home equity loan.
And when you’re ready to sell, we can help you get top dollar to maximize your equity stake.
To help you understand more about the home buying or selling process in Toronto, you can easily download one of my free books... find a list of them here.
If you have immediate questions, contact me today to schedule a complimentary consultation!
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