One of my biggest reasons for recommending buying a home versus renting is equity. Homeownership not only gives you a place to live but allows you the potential to grow your personal wealth. But how much your home is actually worth often becomes something of a mystery to most homeowners.
Keeping track of your home’s value is necessary and many homeowners are often surprised by the amount of equity they’ve gained in just a short period of time owning their home.
Equity is the difference between what you owe on your home and how much your home is worth. Real estate, for the most part, is an appreciating asset, which means while you’re quietly living in your home, your home is quietly gaining value for you.
A lot of homeowners wonder why they should know their home’s value if they don’t plan on selling anytime soon. This is an understandable question.
But the reality is that for most people their home is their biggest financial asset. With that being the case it seems a lot more obvious why a homeowner should keep track of their home’s worth.
Another factor to consider is how fluid the housing market can be. I’ve often seen, and you’ve probably heard it too, that homes increase in value about 7% every year, as though the property you bought was a government bond.
The truth is that the housing market is much more complicated and can accelerate growth much faster than this generalized average. Depending on where you live and when you bought your home, you can see much higher year-over-year equity growth.
For example, over the last 5 years, home values in the state of Maine have increased by over 78%, according to the Federal Housing Finance Agency. New Hampshire has seen similar growth.
That means many homeowners in Maine have seen their equity nearly double since 2020.
So if you’ve been living under the old assumption of 7% equity gain year-over-year, you’ve probably well undervalued your home.
For example, if you bought a home in Maine for $225,000 in 2020, it’s likely to be worth around $380,000 today. However, by the old, passed-around standard you’d expect your home to be worth only around $300,000.
That’s quite the difference!
When you consider how often folks check in on their stocks, 401K and other financial assets, it’s an interesting blindspot to consider how few people check in on the value of their home.
Of course, I’m not talking about estimated values through well-advertised home search websites. I’m referring to actual appraisals or a Comparative Market Analysis, which are much more accurate and reliable than the formulas drawn from generic sites.
To get the best idea on what your home is worth, you need to go through a trustful and accurate source, and that source should ultimately be based on what you might use the equity for.
So what can you use your home equity for? The first option is nothing. The added wealth might be an excellent form of retirement savings. Retirement can be an expensive proposition. Having hundreds of thousands of dollars stored away in your home’s value can be valuable financial insurance as you reach retirement age.
For retirement planning it’s important for you to have an accurate idea of your home’s value, just as it’s important to know what’s in your retirement accounts.
More often, the equity gained in a current home is used to buy another home. Perhaps you need a larger home or a place in a more desirable location. Using the equity in your current home for a down payment on another home can significantly reduce your mortgage cost.
This option allows you to move into a home more suitable for your needs while keeping your personal wealth intact.
Another option is to use the equity as a line of credit. Perhaps you want to renovate your home or expand. You can use your equity to help finance home projects. The nice part about this is that such projects will ultimately help increase your home’s value, minimizing the equity you might’ve lost.
If you’re considering selling your home, whether it be now or in the future – however distant – getting a CMA is your best option.
When it comes to using your home equity for a line of credit or loan, going through a financial institution makes more sense, and will be necessary anyhow.
Even if you don’t have any plans and don’t want to even think about plans, it’s still a good idea to keep track of your home’s value and know how much equity you have.
If you have any questions or concerns, or want to talk more about a CMA, feel free to send me a quick hello! In the meantime, have a great fall and a happy Halloween!
