Three of four homeowners participating in a recent survey said their home represents a large portion of their wealth, and many use the value of their homes when making important financial decisions. That’s good news for those of us who had big losses in the stock market over the last year. The fact is, homeownership — and real estate in general — is one of the best investments you can make.
Accumulating home equity provides us with both financial resources and security. We can use the equity we’ve earned from our homes to get cash for emergencies, as well as for purchasing big-ticket items. And, while the capital gains people realize when they sell their homes are significant sources of down payment funds for most repeat buyers, they’re used for other needs as well.
Equity for the long term
The National Association of Realtors “Home Wealth Effect” survey shows the typical homeowner has an accumulation of equity of about $50,000. Households with incomes greater than $75,000 typically have a median of $100,000 in equity, while households earning less than $40,000 have a median of $40,000 in equity. Households aged 50 or older have a median equity of $80,000.
For homeowners who understand the value of the wealth in their homes as opposed to the value of stocks, bonds and pension plans, the survey found that three out of four homeowners say their house wealth is greater than their stock wealth. Given the stable growth in home values over time, especially when compared with other kinds of investments, it gives people the confidence to use that equity for various needs.
Take Lois and Rick Smith, a Dallas couple in their sixties who are close to retirement. Their kids have long since left home, and they’re thinking about selling their four-bedroom, 2,700-square-foot suburban house to purchase something smaller that’s also closer to the city’s historic downtown area.
They’re in a great financial situation because, when they purchased their home 15 years ago, the area was just beginning to boom. Now, there are major thoroughfares, well-known retailers have opened their doors, and it has become a very desirable place to live. The schools are also top-notch, attracting many young families. Even a conservative estimate would put capital gains when they decide to sell at a minimum of $50,000. As a result, they’re thinking about purchasing a modest family retreat on a lake, in addition to a smaller house in the city.
So, how else do people spend their sale proceeds? According to the survey, 43 percent of funds were used for debt relief, 16 percent were used for the down payment on a second home or vacation home, 11 percent to buy a car, 5 percent for college education and 5 percent to put the funds in the bank.
Only 15 percent of repeat buyers did not use the gain for the down payment on their current home; 5 percent used funds for the down payment on a second home or vacation home. And nearly two out of five repeat homebuyers chose a more expensive home to further improve their standard of living and increase their potential for building even greater household wealth in the future.
Home equity loans
Say you love your home and you’re not interested in selling just yet, but you’d really love to put in that new patio and deck you’ve been dreaming about for years. That’s where home equity comes into play. Homeowners can get a loan based on their investment in the home. About half of homeowners tap their unrealized wealth through the use of home equity loans or a second mortgage, and 22 percent of these homeowners pulled cash out of their home when they refinanced their mortgage.
Home equity loans can be a great option for consumers who want to improve their homes or use the cash for other things, but it’s important to consult a real estate professional and an attorney before signing anything. Here are some do’s and don’ts from the Federal Trade Commission that might help. For more information, visit www.ftc.gov or call toll-free, 877-FTC-HELP (877-382-4357); TTY: 1-866-653-4261.
• Agree to a home equity loan if you don’t have enough income to make the monthly payments.
• Sign any document you haven’t read or any document that has blank spaces to be filled in after you sign.
• Let anyone pressure you into signing any document.
• Agree to a loan that includes credit insurance or extra products you don’t want.
• Let the promise of extra cash or lower monthly payments get in the way of your good judgment about whether the cost you will pay for the loan is really worth it.
• Deed your property to anyone. First consult an attorney, a knowledgeable family member, or someone else you trust.
• Ask if credit insurance is required as a condition of the loan. If it isn’t, and a charge is included in your loan and you don’t want the insurance, ask that the charge be removed from the loan documents. If you want the added security of credit insurance, shop around for the best rates.
• Keep careful records of what you’ve paid, including billing statements and canceled checks. Challenge any charge you think is inaccurate.
• Check contractors’ references when it is time to have work done in your home. Get more than one estimate.
• Read all items carefully. If you need an explanation of any terms or conditions, talk to someone you can trust, such as a knowledgeable family member or an attorney. Consider all the costs of financing before you agree to a loan.
Your home is likely to be your largest investment, and it can help you achieve your dreams, if you use it wisely. Over the long term, the stock market is still a wise investment, but consider your investment options in real estate, too.
For services, contact RE/MAX Genesis at830-833-2000 or lightfoot.com.