One Major Benefit of Investing in a Home? Equity

Buying a home is an excellent way to build wealth and gain financial stability. A house is a tangible asset that can appreciate over time. According to Freddie Mac:

 “Building equity through your monthly principal payments and appreciation is a critical part of homeownership that can help you create financial stability.”

Recent years have seen a significant increase in home prices. The Federal Housing Finance Agency (FHFA) reported that home values rose 18.8% between April 2021 and April 2022. FHFA statistics show that home prices have increased on average by 4.3% each year since 1991. The amount of appreciation varies from state to state, and several factors can affect it. These include supply and demand, location, and the condition of the house to name a few.

 The largest part of most homeowners’ net worth is their equity

In simple terms, equity is the difference between the value of your home and the outstanding balance of your mortgage. Your equity in the house increases as you make mortgage payments. The equity you accumulate can be used to fund other investments, pay off debt, or improve your home.

Building equity through your monthly principal payments and appreciation--the increase in the value of a house over time--is a critical part of homeownership that can help you create financial stability. Additionally, home appreciation  can increase your equity. Some markets appreciate more rapidly than others, but the result can be an increase in wealth and a potential reserve of funds. 

You may be surprised to learn just how much of a homeowner’s net worth actually comes from owning their home. The National Association of Realtors (NAR) shares:

Homeownership is the largest source of wealth among families, with the median value of a primary residence worth about ten times the median value of financial assets held by families. Housing wealth (home equity or net worth) gains are built up through price appreciation and by paying off the mortgage.”

The key to building wealth for an average household is home equity. Data from First American shows this across different income levels:

 

Conclusion

The subject of real estate often dominates headlines, is studied by economists, and is emphasized by policymakers for a reason. Owning a home, regardless of your income level, provides financial stability and an avenue to build wealth. A quantification of the wealth-building power of homeownership reveals that home is not only where the heart is, but also where the wealth is. With spring approaching, now is a good time to consider if buying a home makes sense for you.

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