Build Wealth through Home Equity

The importance of a home is amplified by the pandemic because of "stay-at-home" orders, working from home, and attending online schools at home. These experiences have shown how essential the utility and privacy the home space provides us. What we haven't discussed is other benefits of owning a home or owning real estate.

We value the freedom that comes with owning a home, without worrying about what the landlord wants to do and rules set by others. This is the number one benefit all young learners in my Investment Class for Kids have mentioned. Yet many adults (and kids) do not know too much about the other benefit, home equity. Home equity is the foundation of building generational wealth. According to an article on Forbes in February this year that 28% of Hispanic families’ wealth and 20% of Black families’ wealth were from home equity while16% for white families' wealth was from the same source by the end of 2019.

Home equity is the difference between the mortgage debt you have on your home and the current market value of this home, regardless if the home is for sale or not. For example, if at this moment your home is valued at $700,000 and your mortgage balance (you can find the overall balance on your mortgage statement) is $400,000, your home equity is $300,000. Considering your home as a bank for yourself, now this bank has a positive $300,000 cash flow that you can withdraw for different purposes.

Home price appreciation is one way to build home equity without you taking any actions but letting the market does its thing. Throughout the white hot housing market after the initial lock-down last year till now, a large number of home owners have accumulated a significant amount of home equities, because home price has been increasing, especially in California by double digit. In January 2021, the median price for single family homes in Los Angeles County is around $700,000 and the median price for single family homes in Orange County is at $971,000. Even you just bought a home last January in these two major Southern California markets, you most likely have added $100,000 to your home equity. The other way to increase home equity is to decrease the mortgage balance. At the beginning of your mortgage payment schedule, a bigger portion of your payment goes towards the interest payment; later on, more goes towards the principle (the amount you owe). That's another reason why the longer you hold a home, the more home equity you have; because the principle of your mortgage will be decreasing faster after years of payment. So even without price appreciation, your home equity will increase and will accumulate faster with time.

Remember, your home can be your bank, because of home equity? One approach is to break the piggy bank and get the cash out for something else. Our wages have been stagnated for years and you possibly haven't seen dramatic pay raise since who knows when. While lowered interest rate allows you more purchase power to buy a new home as your family grows, selling your current home and using the home equity you've built as the down payment will let you keep monthly housing cost similar to the current cost, even when you move in a bigger, more expensive home. There are other ways you can tab your home equity, you can talk to a mortgage lender on different options as well as their pros and cons.