Are you considering buying a home? If so, you’re not alone – for most people, purchasing a home is the largest financial transaction they will ever make. But did you know that buying a home is not just a place to live, but also a way to build wealth and increase your net worth over time?
According to CoreLogic, in the second quarter of 2024, U.S. homeowners with mortgages had a net homeowner equity of over $17.6 trillion. Home equity increased by $1.3 trillion in the second quarter of that year, showing an 8.0% growth from the previous year. Your home’s equity is simply the difference between the current value of your home and how much you owe on your mortgage.
But how do new homeowners create equity? Steven LaRosa, a director and senior portfolio manager at Edgemoor Investment Advisors, explains that homeowners don’t acquire equity overnight. It typically takes five to 10 years for equity and net worth to start increasing. Factors such as the down payment, loan term, credit score, and property value appreciation all play a role in how quickly equity grows.
One way to immediately build equity is by making a down payment. For example, if you purchase a $250,000 home and put down $17,500, your immediate equity is $17,500. As you continue to make mortgage payments, a portion of each payment goes towards reducing the outstanding principal that you owe.
Experts say that homeownership allows you to increase your net worth because you can build equity through mortgage payments, which increases your asset value over time as the property appreciates. This is a key difference from renting, which is simply a recurring expense. In fact, the median wealth gap between homeowners and renters has increased by 70% over the past 33 years to $390,000, according to the Urban Institute.
While homeownership can be a wealth-building strategy, it’s important to understand that in the first year or two after buying a home, it may have a negative impact on your net worth. Costs like closing costs and title insurance, as well as the fact that you’re not accumulating equity from monthly mortgage payments in the initial years, can affect your financial situation.
Overall, buying a home can be a great way to build wealth and increase your net worth over time. Stay tuned to Extreme Investor Network for more tips and insights on personal finance and investment strategies to help you achieve financial success.