Home Equity Creates Wealth-Why it Matters and How it Gives You Future Options
One of the most powerful benefits to home ownership is home equity and how it creates wealth. One of the advantages of wealth is options. Options are important to have when life deals you either an unexpected blow or an exciting new possibility.
What is Home Equity?
Recently Freddie Mac, one of the nations largest provider of mortgage funding, posted about the power of home equity. They explained it this way:
“In the simplest terms, equity is the difference between how much your home is worth and how much you owe on your mortgage. You build equity by paying down your mortgage over time and through your home’s appreciation. In a nutshell, your money is working for you and contributing toward your financial future.”
Example of How Home Equity Creates Wealth
Freddie Mac continued by showing an example where a person bought a home for $150,000 with a down payment of 10%, resulting in a loan amount of $135,000.
The buyer secured a 30-year fixed-rate mortgage at 4.5% with a monthly mortgage payment of $684.03 (not including taxes and insurance).
Next they illustrated what would happen after seven years of making a mortgage payment, assuming 3% per year home appreciation (the historic national average):
What’s exciting about the above chart (besides the fact that the owner has $67,518 in equity) is the fact that this number can continue to grow year after year!
Now, if you continued to rent making the same payment of $684.03 per month for the same 7 years, you would have paid $57,458 in rents and still have no equity and no options! The person who bought a home can tap into their equity to take advantage of a business opportunity, home improvements, unexpected medical costs,etc.
The renter has spent their money on paying off their landlord’s mortgage and will not have built any equity.
“Building equity is a critical part of homeownership and can help you create financial stability.”
If you want to follow the sample home owner above you’re probably wondering if you could find a decent house for $150,000. What kind of house would it be?
Call Finding Homes for You today at 636-532-4200 to start your pathway to home equity and more financial mobility in your future!
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