Equity Matters: 7 Different Ways to Use Your Home Equity to Build Wealth
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When it comes to homeownership, we’ve all heard of the word “equity.” It is often said that homeownership builds wealth. So the question is, what exactly is equity and how can it enhance your net worth?
Home equity is the current market value of your home, minus what you owe. Equity gains can come in two ways: Paying down the principal balance you owe and an increase in market value over time.
For the most part, building home equity is a long-term investment; wealth is created over years as the unencumbered portion in the ownership of your home grows. However, in a quick-paced equity market, gains can come rapidly like we’ve experienced recently between 2015 – 2018, when some Hawaii neighborhoods experienced 10-15% growth per year. Since equity can wax and wane with the market and home demand, there are strategies for using your home equity to enhance your net worth and lifestyle while it is available.
1. Increase your real estate portfolio – One of the greatest ways to continue to build wealth is through continued investment. You can leverage the equity built in a home by extracting it in the form of cash to build your real estate portfolio in the following ways:
• Sell the home and use the proceeds to buy your dream or retirement home
• Rent your home and buy another by converting your primary residence into an investment property and buy a new home to live in
• Buy an investment property using your equity as downpayment and stay where you are since you and your family are imbedded in the neighborhood.
2. Eliminate consumer debts (credit cards, car loans, personal loans) The average American household carries a credit card balance of $16,000 and at least one car loan for at least $10,000 or more. One of the best uses of home equity is assembling your debts into one low payment under a mortgage umbrella. By consolidating multiple high interest balances, homeowners can substantially improve their monthly cashflow, making room in their lives for more things they love and need.
3. Make home improvements or create more livable space – Using equity is a great way to let your home pay for its own improvements. In fact, equity used for home improvements is still tax deductible and includes making additions to create a larger home or building an ADU (accessory dwelling unit) to take advantage of Hawaii’s Bill 20 that was signed into law 9/14/2015. Bill 20 allows some homeowners to legally build an ADU on their property, which both creates household income to recoup your investment quicker and also helps to address the affordable housing crisis in the islands.
4. Pay for life’s major expenses – The average student loan debt for class of 2018 graduates is about $40,000. Federal student loans are usually in the range of 5.5 – 10.0, whereas a secured home loan can be in the range of 3.50 – 3.75 in today’s current market. Further, student loans generally have annual caps on borrowing, and even if you have financial aid from the school or other scholarships, you will probably face a cost gap. Your home equity can provide you with enough money to cover those costs without tapping into retirement accounts, expensive private options or living with immense stress as you buckle down to try to keep up with the payments.
5. Create an Emergency fund – Emergencies are a part of life, home maintenance, car troubles, job loss, injury and other needs for your family. Having 12+ months’ worth of living expenses can reduce stress and prepare you for surprises. Taking equity in the form of cash and placing it in your accounts can truly give you a sense of relief and keep you equipped for life’s downturns.
6. Add solar panels and make energy efficiency changes – A typical 5kw solar panel system costs about $20,000 and can run upwards of $65,000 for larger and more powerful systems. Adding solar panels to your home could be a great way to save on your electricity bill and add value to your home while you live in it as well as for when you sell it.
7. Make your dreams (or those of someone you love) come true – weddings, trip of a lifetime, bucket lists and giving those you love a good start. We only live once and using your equity to create memories or bringing your life’s dreams to fruition can be extremely satisfying. In older days, waiting until you pass on to allow your heirs to benefit from your wealth was the mode of thought. However, using your equity to share in the lives of those you love while you are alive to see it, can be very nourishing, and continue your family legacy.
If you have questions for “The Mortgage Professor”, email your questions to me at email@example.com. It would be my pleasure to help you find solutions.
Since 2001, Paramount Residential Mortgage Group (PRMG) continues to be a leading lender in the mortgage industry. As a privately held mortgage banker and residential home lender, PRMG has successfully helped many