By Annemarie Rogers, Mortgage Loan Officer
For the majority of Americans, a home will be the largest asset they own during their lifetime. As a result, homeownership is the single most powerful driver of wealth accumulation in the US economy.
There are two significant factors that lead to wealth accumulation in homeownership. Instead of paying rent, homeowners contribute a monthly amount to the principal of their mortgage, which builds equity over the course of the loan. The forced savings of principal payments result in greater equity, or value of the property not encumbered by a mortgage. Another advantage to homeownership is that unlike rent which usually increases annually, a fixed rate mortgage payment will remain constant over the life of the loan. The only changes to housing costs are increases in property taxes and homeowner’s insurance.
Equity can also be built through market appreciation. During a typical housing market, appreciation rates are expected to rise by 3 – 5%. Michigan has recently enjoyed higher than customary rates of appreciation. According to the Federal Housing Finance Agency’s 2018 Fourth Quarter news release, home values in Michigan rose an average of 7.35% in 2018 and rose a stunning 41.50% over the most recent five years, essentially erasing longer term losses in housing values suffered during the most recent recession.
Stability is another important factor in wealth accumulation. Homeowners who move less frequently will generally build equity faster, as they aren’t paying real estate commissions and transfer taxes until they sell a home. Frequent moves will stagnate the growth of equity in a typical real estate market, as it usually takes about five years of principal payments and market appreciation to build the equity sufficient to cover real estate costs associated with selling a home.
Another factor in building equity in your home is by selecting the best possible mortgage product. Affordability is an important factor in selecting a mortgage product, as you want to have a comfortable payment every month that doesn’t stretch your budget. However, selecting a mortgage with terms shorter than the common 30-year term, will help build equity, and in turn, personal wealth by paying rates generally lower than that of the 30-year mortgage, and will also result in an increased payment of principal over the life of the loan.
For example, a homeowner financing $100,000 over 15 years, instead of the typical 30 years, will see increased equity of more than $40,000 over the first 10 years of their mortgage. Even with the less aggressive 20-year mortgage, the increase in equity over the same period is greater than $20,000.
Lastly, homeownership and the equity and wealth it builds over time, can improve your financial position during your life and in preparing for retirement. The accumulated wealth can help avert a financial tragedy by having an asset to draw upon to help ride out hard times, such as illness or job loss. It is a valuable asset that can be borrowed against to help pay for college for children.
Homeownership is also an important factor in preparing for retirement. Many homeowners prefer to have their homes paid in full before they retire in order to provide a low cost of living while usually on a fixed income. Other retirees will sell their homes and use the proceeds to supplement their retirement income, preferring instead for the flexibility of renting during retirement.
Sustainable homeownership is an important driving factor for wealth building. Purchasing a home you can afford with payments that are comfortable for your budget will help the dream remain a reality. The sooner you embark on the dream of homeownership, the more wealth you will generally amass over time.