It's easy to see that home prices have risen over the past few years but it's not necessarily easy to see what this means for you as a homeowner. And the news isn't just exciting, it's filled with possibility to make that equity work for you instead of sitting stagnant!
First, let's understand a little more about home equity. The basic definition is the difference between your home's current market value minus any liens held against the home such as a mortgage. For instance, let's say I own a home with a current market value of $350,000 but my outstanding liens total $200,000.
Boom- $150,000 in equity (give or take).
This value clearly fluctuates over time as you continue making monthly payments while ebbing and flowing in conjunction with home values in your local housing market. Nonetheless, the idea remains the same: Home Worth - Liens = Equity
We know- it may seem counterintuitive at first to borrow money against your mortgage or pull out those funds, but when those dollars just sit still, they're not working for you. Period.
First, let's overview a few drawbacks to leaving your equity sit because, let's be honest, it always feels good knowing you currently hold an asset that is worth more than you owe (or even paid in the beginning).
Unfortunately, those dollars are currently providing you zero return and are forcing you to work for your money instead of the other way around.
Bill Tye, mortgage lender with GreenState Credit Union in Cedar Falls, Iowa, lays out a few drawbacks to sitting on your home's equity in a recent interview with Gordie Sorensen, Broker/Owner of Re/Max Home Group and REALTOR® with Twin Power Group Real Estate.
Consider an asset for a moment. While there are many asset examples (home, car, etc.) the definition remains the same. They are items of economic value, defined by their worth. So, consider this-
Would you own an asset that:
-You can pay more than the established monthly contribution but never less for the duration of ownership.
-If you pay less, the financial institution keeps all of your previous contributions.
-Contributions paid into the asset are not liquid, meaning you do not have immediate access to those funds no matter the circumstances.
-The money in your account creates zero rate of return.
-Your income tax liability potentially increases with each new contribution.
-When the asset is fully funded, there is no income paid out to you.
"Wow, I hope you're not describing my home mortgage!" And while Gordie is close here, he's not quite one-hundred percent on the money.
"So, what we're talking about there is actually your equity," Bill states. "While homeownership is the greatest investment that we're able to obtain...there's a difference between your home ownership, your appreciation, and your home equity.
"A great way to generate even more wealth than just owning a home is to be able to figure out 'What do I do with this thing called equity to increase my overall wealth?'"
And that really is the million dollar question. And the one we're here to answer!
Lenders offer a wide variety of products to help you utilize your home's equity in order for those dollars to generate wealth and additional long-term income. Bottom line- pull out those funds utilizing a mortgage product that fits your needs and lifestyle and invest in something that creates wealth. It really is that simple.
Gordie, a real estate investor himself, has done exactly what we are suggesting: "With your equity, you could take out a home equity line of credit, or different products, and use that money to buy some investment properties that actually generate income and start creating generational wealth."
Additionally, Bill adds one important factor:
"It's not that you should max yourself out to where you're in trouble financially."
Clearly, no one wants to max out their budget, hoping for a high rate of return in the future by eating cat food today...
Be smart and honest with your lender about what you can afford and what you're comfortable with.
"You can also utilize your current home's equity to purchase a higher priced home," Bill states, highlighting yet another option for utilizing those funds.
Why would you want to do this? In using your current home's equity toward a new home, you may be able to keep your new payment equitable to your new home's payment. You are also, then, in a home thats equity increases at a higher rate, thus providing you with even more equity in the long run.
Understanding not only what home equity is but what you can use it for is crucial. And now is a great time to learn! Your money is not working for you when it sits as equity. There are many ways to utilize these dollars to create generational wealth- wealth that builds and lasts.
Take a few minutes to speak with your Twin Power agent and discuss more about your home’s true value and what you may be able to do with the equity you’ve accumulated over the years.
*View Gordie's full interview of Bill below to learn even more*
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