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More homeowners than ever are “equity-rich,” meaning their home equity has provided significant wealth to them. How do you join these lucky folks?
- Own a home — one Harvard study showed that homeowners acquire about 27 times the wealth of renters
- Make your payments — homeownership creates “forced savings” in which you’re required to deposit money into your property until you pay off your mortgage — leaving you with a free-and-clear, significant asset
- Use restraint when cashing out home equity with a mortgage or home equity loan. They can be used for any purpose, but some, like investments, contribute to your financial well-being, while others can drain your equity without providing any economic benefit
- Don’t move too often, because buying and selling homes involves significant costs
- Don’t pay too much for your home — check values carefully and know a good deal when you see it
In addition, choosing a mortgage with a shorter term, or pre-paying your home loan can accelerate the accumulation of home equity and shorten the time you spend making monthly home loan payments.
Aim for a home equity-rich home
Buying a home has its perks. These include the ability to grow equity. Equity is the difference between the fair market value of your property and the amount you owe your lender.
Building home equity is important. That’s because you get to pocket the value of your equity when you sell your home. You can also tap into your equity via cash-out refinance, HELOC, or HELOAN. This allows you to borrow money for things like home improvements, a new business or college tuition.
A new study shows that more homes are flush with equity than ever before. That’s good news for homeowners. And it’s another good reason to become one.
What the research found
Fresh findings from ATTOM Data Solutions reveal that more homes than ever before are “equity rich.” This means the combined estimated amount of loans secured by the property was 50 percent or less of that property’s estimated market value. In the third quarter of this year:
- Almost 14.5 million U.S. properties were home equity rich. That’s an increase of over 433,000 from this time last year. And that marks a new high
- These 14.5 million “equity rich” homes account for over one-quarter of all properties with a mortgage.
- The five states with the highest share of equity-rich homes were: California (42.5%); Hawaii (39.4%); Washington (35.3%); New York (34.9%); and Oregon (33.6%)
- The five metro areas with the highest share of equity-rich homes were: San Jose (73.9%); San Francisco (59.8%); Los Angeles (47.6%); Seattle (41.2%); and Honolulu (40.8%)
Reading between the research
Some of these findings amazed Daren Blomquist, senior vice president for ATTOM Data Solutions.
“Home price appreciation has slowed in the last few months. So I was somewhat surprised to see the number of equity-rich homeowners increase so dramatically,” he says.
Blomquist believes more owners are home equity rich for a big reason: they’re leaving their equity intact.
“They’re not tapping into it with cash-out refinancings and home equity lines of credit as much as we might expect. Rising mortgage rates may also have something to do with that, which has put the brakes on refinance activity,” he adds.
There’s another reason behind rising home equity: Homes continue to increase in value.
“Steady home price appreciation nationwide over the past few years has handily beat the long-term benchmark of 3 percent annual appreciation. Even with appreciation slowing, we are still seeing about 5 percent annual appreciation nationwide so far this year, ” says Blomquist.
“And in many markets, we continue to see double-digit appreciation. This is boosting home equity rapidly.”
Why it’s good to be equity-rich
Increasing your home equity is smart. That’s because higher home equity is often your best passive path to building wealth over the long term.
“For most people, the ideal use of that home equity will be for retirement,” notes Blomquist. “So it’s a worthy goal to take a long-term view of that equity.”
What to expect
Equity growth rates will vary, depending on your market, your home’s condition, and other factors. But, on average, you can likely expect home prices to appreciate about 3 percent annually over time, per Blomquist.
“If you hold your home over a period of 20 years or more, that average should be a reliable benchmark. Certainly, there are opportunities to beat that benchmark. But you shouldn’t necessarily count on those,” he says.
Blomquist believes home equity growth will likely slow in the final quarter of 2018 and in 2019. The reason? Continued slowing of home price appreciation.
“You should also expect to see some sort of correction in home prices over the next couple of years. This may vary in severity – and may not even happen – depending on the local market. But it’s good to prepare for the worst-case scenario,” he says.
The good news?
“This correction will almost certainly not be as severe as the Great Recession housing downturn. That’s when many markets saw a 30 to 50 percent drop in home values. Most likely any correction will involve single-digit depreciation. And it won’t last longer than a year or two,” he adds.
Tips on building and using home equity
Want to build equity (and personal wealth) more quickly? Follow these suggestions.
Become a homeowner. “After paying down student debt and other forms of high-interest debt and creating a rainy day and retirement savings plan, building wealth through homeownership should be the next highest financial priority,” says Blomquist.
Buy a home in a good market. Look for neighborhoods where home values have shown a track record of steady appreciation.
Pay off your mortgage as quickly as possible, if you can afford it. “Try putting down an extra $100 a month toward your principal,” he says. This will reduce the amount of interest you pay over the life of your loan and grow your equity more quickly.
Take the long view. “Expect to hold a property for at least five years to really gain traction with building equity,” he notes.
Aim to have your mortgage paid off by the time you want to retire. “This approach hedges against the roller coaster effect that home price volatility can have on home equity,” he says.
Tap into your home equity only if necessary and for the right reasons. These include paying for a remodel that reinvests money back into your home and increases your resale value. “That beats tapping into your home equity early to pay for depreciating assets like cars, boats or vacations,” Blomquist says.