Homeownership provides an ingenious set of simple investment techniques that everyone can use to put their money to work. Most homeowners don’t necessarily think of their home as an investment, but the average American homeowner has a net worth of $200,000, which is 30 times the net worth of the average renter.
There are numerous benefits to homeownership, but the financial ones are incredible. There is no other investment with such a likely, solid rate of return that you can live in while it’s growing in value. Creating wealth with your home is not a sexy, high-risk high-reward gamble, but a steady accumulation over time.
How can your home help you grow your wealth? And how can you make a few small moves in the short term to increase your return on “your home as an investment?”
The short answers are: normal home value appreciation, building equity quickly with a few simple techniques, and savings on your Federal taxes.
Experts expect home prices to appreciate 3.24 percent and grow by 21.4 percent cumulatively over five years. If a homeowner purchases a home this year for $250,000, they could earn more than $43,000 in equity over the next five years. The average value of a single family starter home in Dallas is $198,000. Applying an average expected appreciation, your investment could increase in value approximately $34,000.
If you’re curious about the value of your home, give me a call at (972) 591-3796. I would be happy to provide a free report of the current fair market value of your home. No cost. No obligation.
Building Home Equity
Americans in general are terrible at saving money. Think of your home as a kind of stealth savings plan. The majority of your mortgage payment will pay interest on your loan for the first five to seven years, but over time more of your monthly payment will be applied to the principal. As you pay off your home, you build equity. Equity = wealth.
There are a few simple ways that you can build home equity faster.
How to Build Equity Faster
Interest rates on conventional mortgages are at a 30 year low right now, so the cost of money is cheaper than it has been since the 90’s. If you’d like to learn more about your buying power and interest rates, click here. Leverage the lower monthly costs of a home mortgage to pay off your loan early, saving on interest payments, and putting money into an asset that is increasing in value.
Here are a few ways to pay off your mortgage early:
1. Make one extra standard mortgage payment each year. One extra payment per year can shorten the life of your loan by SEVEN YEARS. 30 year conventional mortgage? Not so fast.
2. Add an extra $50, or another amount you can afford, to the principal of your payment each month. Every little bit adds up. Put your mortgage payment with a little extra on auto-draft, and you In a “low-and-slow” approach, you will still shave years off your mortgage and grow the equity in your home.
3. If you receive a tax refund or other windfall, apply it toward your principal. I am a big fan of using tax refunds for real estate.
4. If you are locked into a 30-year fixed loan, refinance to a shorter, 15-year fixed loan. Your payment may be higher, but you’ll pay it off sooner. I call a 15 year conventional mortgage the Home Equity Bullet Train.
The Home Equity Bullet Train – 15 Year Mortgage
My buyers do often ask me about the pros and cons of a 30 year versus a 15 year conventional fixed rate mortgage. For many home buyers, the best option is the 15 year mortgage. You will accrue equity faster. The drawback is, of course, that your monthly payment will be significantly higher. By choosing a 15 year mortgage, you can save a lot of money that you would otherwise spend on interest. See the table below.
Homeownership and Taxes
One of the classic benefits of homeownership is that it can help you keep a but more of your money out of the tax man’s pocket. Sweet enough to be worth it on it’s own. Homeowners can deduct the interest paid on a first and second mortgages up to $750,000 in mortgage debt.
To sum up:
Building wealth is all about investing your money in assets that increase in value over time. Most likely, you will be using Other People’s Money (that’s the bank, in this case) to make your purchase. With a few small, smart financial moves, you can own a valuable asset and increase your net worth while saving on loan interest and Federal Taxes.