Home equity is what your property is worth after deducting the money that you owe from its current appraised value. It is one of the reasons that compel people to put their hard-earned dollars in homes for sale in Kansas City, San Francisco, Denver, Salt Lake City, and other hot real estate markets. Although it is illiquid, this form of wealth may convince you that buying a house is a decision sound enough to give up the conveniences of renting.
If truth be told, the beauty of home equity is a bit overstated. Its rate of growth is predicated on not just market forces but also your commitment to avoid delinquency. Its opportunity cost can limit your potential for wealth building if you tie most of your income with your house.
Should you still buy a house despite the typical glorified importance given by many to home equity? The answer is yes. There are three main reasons you should nevertheless place a premium on it when pursuing homeownership.
Home Equity Can Keep Your Mortgage Above Water
The reason millions of Americans lost the roof above their heads during the last financial crisis was that they lacked enough home equity. It increases as property prices rise, and it decreases when house values drop. When the housing bubble popped, many mortgage borrowers found themselves owing more than what their houses were worth.
A mortgage becomes underwater usually when its borrower is actually not qualified for it in the first place. By loaning most of the funds needed to buy the house, a homeowner is likely to face foreclosure when enough payments are missed. Sharp property depreciation can diminish any gains achieved through principal payments over the years.
Building home equity at a fast rate provides a financial cushion against a real estate market crash. To do this successfully, purchase a house in the right location, pay a large down payment, opt for a 15-year loan, take home improvement seriously, and make extra mortgage payments.
Home Equity Can Be an Instant Source of Tons of Cash Later On
If you have adequate home equity, you can turn it into a large check by refinancing your loan or taking out a second mortgage in the future. You can use the money for whatever purpose so that you can still grow your wealth even if you convert your home equity into debt.
Home Equity Can Make You Richer When You Downsize
Another way to unlock the equity built on your property is by selling your house. If you move to a smaller and cheaper property, the extra money you can pocket from the deal can beef up your retirement savings.
The security and prosperity home equity represents are compelling reasons to buy a house. However, understand that homeownership does not only mean feeling secure and prosperous. You also have these feelings when you rent. It is imperative to look at home equity with an objective eye to avoid making a big-ticket purchase that you might regret in the long run.