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Take Advantage of Your Home Equity: A Homeowner’s Guide
Homeownership offers many advantages over renting, including a stable living environment, predictable monthly payments, and the freedom to make modifications. Neighborhoods with high rates of homeownership have less crime and more civic engagement. Additionally, studies show that homeowners are happier and healthier than renters, and their children do better in school.1
But one of the biggest perks of homeownership is the opportunity to build wealth over time. Researchers at the Urban Institute found that homeownership is financially beneficial for most families,2 and a recent study showed that the median net worth of homeowners can be up to 80 times greater than that of renters in some areas.3
So how does purchasing a home help you build wealth? And what steps should you take to maximize the potential of your investment? Find out how to harness the power of home equity for a secure financial future.
WHAT IS HOME EQUITY?
Home equity is the difference between what your home is worth and the amount you owe on your mortgage. So, for example, if your home would currently sell for $250,000, and the remaining balance on your mortgage is $200,000, then you have $50,000 in home equity.
$250,000 (Home’s Market Value)
- $200,000 (Mortgage Balance)
$50,000 (Home Equity)
The equity in your home is considered a non-liquid asset. It’s your money; but rather than sitting in a bank account, it’s providing you with a place to live. And when you factor in the potential of appreciation, an investment in real estate will likely offer a better return than any savings account available today.
HOW DOES HOME EQUITY BUILD WEALTH?
A mortgage payment is a type of “forced savings” for home buyers. When you make a mortgage payment each month, a portion of the money goes towards interest on your loan, and the remaining part goes towards paying off your principal, or loan balance. That means the amount of money you owe the bank is reduced every month. As your loan balance goes down, your home equity goes up.
Additionally, unlike other assets that you borrow money to purchase, the value of your home generally increases, or appreciates, over time. For example, when you pay off your car loan after five or seven years, you will own it outright. But if you try to sell it, the car will be worth much less than when you bought it. However, when you purchase a home, its value typically rises over time. So when you sell it, not only will you have grown your equity through your monthly mortgage payments, but in most cases, your home’s market value will be higher than what you originally paid. And even if you only put down 10% at the time of purchase—or pay off just a small portion of your mortgage—you get to keep 100% of the property’s appreciated value. That’s the wealth-building power of real estate.
WHAT CAN I DO TO GROW MY HOME’S EQUITY FASTER?
Now that you understand the benefits of building equity, you may wonder how you can speed up your rate of growth. There are two basic ways to increase the equity in your home:
- Pay down your mortgage.
We shared earlier that your home’s equity goes up as your mortgage balance goes down. So paying down your mortgage is one way to increase the equity in your home.
Some homeowners do this by adding a little extra to their payment each month, making one additional mortgage payment per year, or making a lump-sum payment when extra money becomes available—like an annual bonus, gift, or inheritance.
Before making any extra payments, however, be sure to check with your mortgage lender about the specific terms of your loan. Some mortgages have prepayment penalties. And it’s important to ensure that if you do make additional payments, the money will be applied to your loan principal.
Another option to pay off your mortgage faster is to decrease your amortization period. For example, if you can afford the larger monthly payments, you might consider refinancing from a 30-year or 25-year mortgage to a 15-year mortgage. Not only will you grow your home equity faster, but you could also save a bundle in interest over the life of your loan.
- Raise your home’s market value.
Boosting the market value of your property is another way to grow your home equity. While many factors that contribute to your property’s appreciation are out of your control (e.g. demographic trends or the strength of the economy) there are things you can do to increase what it’s worth.
For example, many homeowners enjoy do-it-yourself projects that can add value at a relatively low cost. Others choose to invest in larger, strategic upgrades. Keep in mind, you won’t necessarily get back every dollar you invest in your home. In fact, according to Remodeling Magazine’s latest Cost vs. Value Report, the remodeling project with the highest return on investment is a garage door replacement, which costs about $3600 and is expected to recoup 97.5% at resale. In contrast, an upscale kitchen remodel—which can cost around $130,000—averages less than a 60% return on investment.4
Of course, keeping up with routine maintenance is the most important thing you can do to protect your property’s value. Neglecting to maintain your home’s structure and systems could have a negative impact on its value—therefore reducing your home equity. So be sure to stay on top of recommended maintenance and repairs.
HOW DO I ACCESS MY HOME EQUITY IF I NEED IT?
When you put your money into a checking or savings account, it’s easy to make a withdrawal when needed. However, tapping into your home equity is a little more complicated.
The primary way homeowners access their equity is by selling their home. Many sellers will use their equity as a downpayment on a new home. Or some homeowners may choose to downsize and use the equity to supplement their income or retirement savings.
But what if you want to access the equity in your home while you’re still living in it? Maybe you want to finance a home renovation, consolidate debt, or pay for college. To do that, you will need to take out a loan using your home equity as collateral.
There are several ways to borrow against your home equity, depending on your needs and qualifications:5
- Second Mortgage - A second mortgage, also known as a home equity loan, is structured similar to a primary mortgage. You borrow a lump-sum amount, which you are responsible for paying back—with interest—over a set period of time. Most second mortgages have a fixed interest rate and provide the borrower with a predictable monthly payment. Keep in mind, if you take out a home equity loan, you will be making monthly payments on both your primary and secondary mortgages, so budget accordingly.
- Cash-Out Refinance - With a cash-out refinance, you refinance your primary mortgage for a higher amount than you currently owe. Then you pay off your original mortgage and keep the difference as cash. This option may be preferable to a second mortgage if you have a high interest rate on your current mortgage or prefer to make just one payment per month.
- Home Equity Line of Credit (HELOC) - A home equity line of credit, or HELOC, is a revolving line of credit, similar to a credit card. It allows you to draw out money as you need it instead of taking out a lump sum all at once. A HELOC may come with a checkbook or debit card to enable easy access to funds. You will only need to make payments on the amount of money that has been drawn. Similar to a credit card, the interest rate on a HELOC is variable, so your payment each month could change depending on how much you borrow and how interest rates fluctuate.
- Reverse Mortgage - A reverse mortgage enables qualifying seniors to borrow against the equity in their home to supplement their retirement funds. In most cases, the loan (plus interest) doesn’t need to be repaid until the homeowners sell, move, or are deceased.6
Tapping into your home equity may be a good option for some homeowners, but it’s important to do your research first. In some cases, another type of loan or financing method may offer a lower interest rate or better terms to fit your needs. And it’s important to remember that defaulting on a home equity loan could result in foreclosure. Ask us for a referral to a lender or financial adviser to find out if a home equity loan is right for you.
WE’RE HERE TO HELP YOU
Wherever you are in the equity-growing process, we can help. We work with buyers to find the perfect home to begin their wealth-building journey. We also offer free assistance to existing homeowners who want to know their home’s current market value to refinance or secure a home equity loan. And when you’re ready to sell, we can help you get top dollar to maximize your equity stake. Contact us today to schedule a complimentary consultation!
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.
- National Association of Realtors -
- Urban Institute -
- Census Bureau -
- Remodeling Magazine -
- Investopedia -
- Bankrate -
2020 Outlook: Real Estate Market Forecast
We’re in the midst of the longest economic expansion in U.S. history, and economists think there’s still room to grow. A recent survey by the National Association for Business Economics found that experts believe the U.S. economy will remain positive throughout 2020.1
Still, given that recessions are a natural (and necessary) part of a business cycle, we know this period of growth will inevitably end. So you may be wondering … how will an eventual recession impact the real estate market?
Many Americans assume a recession would lead to a decline in housing prices like we saw during the Great Recession of 2008. But the real estate market crash we experienced wasn’t typical. In fact, the last recession wasn’t typical at all. It was the worst economic downturn since the Great Depression of the 1930s.
ATTOM Data Solutions analyzed real estate prices during the last five recessions and found that, in the majority of cases, home prices actually went up. Only twice (in 1990 and 2008) did prices decline, and in 1990 it was by less than one percent.2
So what can historical precedent—combined with today’s data—tell us about the future of real estate? Here’s where experts predict the housing market is headed in 2020 and beyond.
HOME PRICES WILL KEEP RISING
Economists predict U.S. housing prices will continue to rise, regardless of a recession. In fact, property data firm CoreLogic forecasts a faster rate of growth for home prices in 2020 than we saw in 2019, with the biggest gains at the lower end of the market.3
Arch MI Chief Economist Ralph DeFranco expects entry-level home prices to increase faster than incomes this year, making it even more difficult for many first-time buyers to afford to enter the market.4
“Low interest rates and a shortage of starter homes will continue to push up prices,” predicts DeFranco. “This is especially the case for lower price points, since builders have tended to focus on more expensive, higher-profit houses and less on replenishing low inventories of entry-level homes.”4
“Real estate is on firm ground with little chance of price declines,” said National Association of Realtors Chief Economist Lawrence Yun. "However, in order for the market to be healthier, more supply is needed to assure home prices as well as rents do not consistently outgrow income gains.”5
What does it mean for you? If you have the ability and desire to buy a home now, don’t let a fear of recession or falling prices hold you in limbo. Economists expect home values, as well as rent prices, to continue rising. So you’ll likely pay more the longer you wait.
INVENTORY CONSTRAINTS WILL CONTINUE
According to Redfin, Americans are staying in their homes longer. In 2019, the average homeowner had resided in their home for 13 years, up from just eight years in 2010. That means there are fewer homes available today for those who want to buy.6
It’s possible that an increase in new construction could offer some relief. The National Association of Realtors (NAR) expects single-family housing starts to total one million this year, the highest level since 2007. And NAR Chief Economist Lawrence Yun predicts the average price of new construction will decline slightly as builders shift to building smaller, more affordable homes.7
However, these efforts may not be enough to meet current demand. “Despite improvements to new construction and short waves of sellers, next year will once again fail to bring a solution to the inventory shortage,” predicts Realtor.com Senior Economist George Ratiu. “In 2020, we expect inventory to struggle to grow and could instead reach a historic low level.”8
What does it mean for you? If you’re looking to buy a starter home, be prepared to compete for the best listings. Start your search early, and if you’re up against a deadline (like a new baby), build in plenty of time to find the right home. We can help you assess your options, including new construction and up-and-coming developments.
MORTGAGE RATES WILL REMAIN LOW
Mortgage rates have declined more than a full percentage point since November 2018, when they hit a recent peak of 4.94%.9 The Mortgage Bankers Association predicts rates will remain low, at around 3.7%, through mid-2021.10
While it may not seem significant, on a $200,000 30-year fixed-rate mortgage, that lower rate means buyers could save around $145 on their monthly payment and more than $52,000 over the life of their mortgage. Lower mortgage rates make homeownership more accessible and affordable for buyers.
Although economists expect mortgage rates to stay low, they caution against waiting to act. Economic factors, shifts in supply and demand, or unforeseen impacts of the November election could cause rates to rise unexpectedly. “We recommend borrowers with long-term plans of staying in their homes to lock in a low rate now because there’s no telling how long these low rates will last,” warns Preetam Purohit, a capital markets trader at Embrace Home Loans.11
What does it mean for you? If you’re looking to buy a home, act soon to lock in a historically low mortgage rate. It will minimize your monthly payment and could save you a bundle over the long term. And if you plan to stay in your current home for a while, consider whether it makes sense to refinance your mortgage at today’s lower rates.
MILLENNIALS WILL DRIVE THE MARKET
Millennials are expected to account for more than half of all mortgages this year, outnumbering Generation X and Baby Boomers combined. It’s not surprising, considering their age and stage of life. In 2020, the largest cohort of millennials will turn 30, and the oldest millennials will turn 39.8
"Family changes tend to drive home-buying decisions," explains Realtor.com Chief Economist Danielle Hale. "Millennials are going to be active in the housing market not just because they're just at the age when they're thinking about becoming first-time home buyers, but they're also in the age range when they're having kids."12
Younger millennials flocked to urban centers that offered easy access to work, shopping, and restaurants. But high prices, lack of square footage, and subpar schools are driving millennials out to the suburbs as they begin to marry and expand their families.
In response, a new model for suburban living has emerged. “Hipsturbias,” or mixed-use communities that bring the live/work/play concept to the suburbs, were recently named one of the top real estate trends for 2020 by the Urban Land Institute.4
What does it mean for you? If you’re a millennial who has been priced out of urban living or is looking for more space for your growing family, a number of suburbs in our area have a lot to offer. We can point you towards the communities that will best meet your needs. And if you’re a homeowner with plans to sell, give us a call. We know how to market your home to millennials … and can help you sell quickly for top dollar by appealing to this leading market segment!
WE’RE HERE TO GUIDE YOU
While national real estate numbers can provide a “big picture” outlook, real estate is local. As local market experts, we can guide you through the ins and outs of our market and the issues most likely to impact sales and home values in your particular neighborhood.
If you’re considering buying or selling a home in 2020, contact us now to schedule a free consultation. We’ll work with you to develop an action plan to meet your real estate goals this year.
START PREPARING TODAY
If you plan to SELL this year:
- NBC News -
- Curbed -
- HousingWire -
- Forbes -
- National Association of Realtors -
- Redfin -
- HousingWire -
- Realtor.com -
- YCharts -
- MBA Mortgage Market Forecast November 2019 -
- Dallas Morning News -
- Realtor.com -
July 22, 2019
Buyers put a lot of their focus on the kitchen. After all, it can be one of the most expensive rooms to remodel and its features and conditions can make or break a sale.
Designers recently shared a list of the items with realtor.com® that could be subtly sabotaging a kitchen’s attractiveness, including:
“Nothing screams ‘cheap kitchen’ more than outdated fluorescent tube lighting with a yellowing plastic cover,” Jamie Novak, author of “Keep This Toss That,” told realtor.com®. Swapping out bad lighting for a budget-friendly chandelier or pendant lights can make a big difference, designers say. Or, try a small table lamp on the kitchen counter to soften the light, and remove any curtain valances from the window to allow more natural light in, suggests Karen Gray-Plaisted of Design Solutions KGP.
Clutter is the enemy when you go to sell a home, and that means piles of old mail or several small appliances sitting on top of countertops. “Keeping anything up there, like teapots or dried flowers, is a dated way to decorate a kitchen,” Katie McCann, a professional organizer and owner of Haven, a home and office organizing company in New York, told realtor.com®. Remove rows of planters, baskets that line the top of kitchen cabinets, and any knickknacks on the countertop, designers say.
Dated drawer knobs
Drawer knobs or pulls that are chipped or scratched can make a kitchen look unkempt. However, this can be an inexpensive DIY project that provides an instant update. “Think of them as jewelry for the space,” Drew Henry of Design Dudes told realtor.com®.
Fake plants can cheapen a kitchen’s look, too. Remove the artificial potted ivy at the top of the refrigerator or row of faux greenery at the top of the kitchen cabinets. Instead, have a vase of fresh flowers on the kitchen island, or place a few potted herbs along the kitchen windowsill for a real touch of greenery, Novak suggests.
Unsightly trash cans
Plastic anything needs to be removed, designers say—especially that free-standing plastic trash can on the floor. If it needs to be left out, swap it out for a trash can made of metal. It’ll offer a more polished look to the kitchen. Better yet, “go for a model that will fit in a closet or pantry, or install a cabinet unit that offers the slide-out trash can feature,” Henry suggests.
Read the full list at realtor.com®.
“‘Does My Kitchen Look Cheap?’ 8 Things That Are Sabotaging Your Style,” realtor.com® (July 19, 2019)
The luxury lifestyle isn’t just about looking great anymore. It’s about feeling great, too. Of course, the world’s affluent still want jaw-dropping properties with inspiring views, but they’re also looking for more substance. In today’s fast-paced world, they also want homes that can challenge them physically, calm them mentally, and keep them centered.
As a result, wellness-related amenities have exploded in recent years. In fact, according to a report from ONE Sotheby’s International, properties with wellness-focused amenities sell for anywhere from 10% to 25% more than traditional luxury properties. In the luxury world, that can mean a significant sum of cash.
But what exactly are these amenities that today’s luxe buyers are looking for? The following are just some of the health and wellness features today’s top-tier buyers have on top of their wishlists. The Institute for Luxury Home Marketing is an authority on the world of luxury real estate and works with its members to provide insights and information about the latest trends.
#1: MEDITATION ROOMS
Meditation rooms—quiet, peaceful spots dedicated to self-reflection—are quickly becoming a hot commodity for the world’s elite. Tech-driven virtual mediation spaces are even hotter. These use a combination of virtual reality technology and tranquil design to enhance the owner’s meditative practices.
#2: SAUNAS AND MASSAGE ROOMS
Dedicated places to unwind and relax are also high on the list for top-tier buyers. They want saunas that can remove all the toxins of the day, private massage rooms where their on-call masseuse can get to work, and in-home spa stations, where they can enjoy a facial, get a Botox treatment or have their hair done without ever leaving the comfort of their own home.
#3: ON-SITE ORGANIC MEALS
Access to fast, healthy, and sustainably sourced meals is important to the world’s elite, and many luxury developers are finding ways to cater to this need. From bringing in five-star restaurants to deliver door-side, organic meals to on-site nutritionists and rooftop vegetable gardens, luxe real estate is offering buyers their pick of healthy at-home dining options.
#4: YOGA AND PILATES STUDIOS
Those dedicated to the art of yoga or Pilates often seek out properties with in-house studios—places they can hone their craft or enjoy one-on-one sessions with their trainer. In high-rise builders or condos, these might even take the shape of outdoor yoga decks or rooftop, private studios.
#5: TRANQUILITY GARDENS
These peaceful gatherings of greenery bring peace to the busy lives of affluent clients. Typically situated on high-rise rooftops in gritty, concrete-filled urban centers, they’re a haven of natural foliage to the affluent city-dwellers who call these spots home. Some developers are even taking this trend to the next level and offering full, on-site private parks.
#6: OXYGEN CHAMBER PODS AND CRYOTHERAPY BOOTHS
One of the perks of affluence is getting to enjoy the latest technologies and products before they become publicly widespread. In the wellness world, you can count cryotherapy and hyperbaric oxygen therapy among these. Many of today’s top-tier clients are looking to bring these new and evolving approaches into their homes to improve their health and increase their longevity. They’re especially popular with athletes, runners, and fitness enthusiasts, these high-tech amenities are known to increase blood flow and improve energy.
WHAT DO YOUR BUYERS WANT?
Knowing what the buyers are currently looking for in your local market—whether that is health and wellness or the latest interior decor trend—is critically important in today’s market, which is predominantly controlled by the purchaser. It can help understand the value of your property and determine whether or not adjustments, renovations or changes need to be made in order to achieve your desired goals, or more importantly help you stand out from your competition!
Want to learn more about what today’s luxe buyers and sellers are looking for? Consider working with one of our Members, Certified Luxury Home Marketing Specialist, who offer a deep understanding of this niche market.
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