4 Ways Homeownership Helps Build Wealth

Let's face it, we all dream of retiring early and sipping rum and coke on a beach somewhere in Hawaii. Okay, maybe rum and coke isn't your drink and maybe you don't love the beach (I'm a mountain man myself, though I do love the year round pleasant weather in Florida), but you get the idea.

The reality for most of us though, is that we won't retire early. But the good news is a solid financial foundation isn't so out of reach. Here are four ways you can take advantage of your home equity:

Consolidate High Interest Debt With a Home Equity Line of Credit (HELOC)

Not to be confused with a home equity loan, a HELOC is a revolving line of credit (think like a credit card) that is secured against the equity in your home. HELOCs typically have a 10 year draw period, which means over the life of the line of credit you can draw from it. As you draw you make payments (again, like a credit card) and as you pay money back the available balance is restored.

The primary advantage offered by a Home Equity Line of credit is that they typically come with lower interest rates than other kinds of loans. Consolidating high interest debt means you could lower your monthly payments, but like with any kind of credit it comes with risks: in this case, it's that your home serves as collateral for the loan. Another advantage offered by HELOCs is that the interest may be tax deductible. If you are considering a HELOC its best to speak with your tax advisor about these advantages.

Cash-Out Refinance and Buy an Investment Property

A cash-out refinance is a type of mortgage that allows you to take advantage of the equity you already have in your home in exchange for a larger mortgage. Unlike a second mortgage it doesn't add an additional monthly payment to your plate, instead you're simply paying off your old mortgage and replacing it with a new mortgage.

Let’s say that your home was $300,000 and you’ve paid off $100,000. Let’s also say that you want to buy a condo as an investment. You need $15,000 for the downpayment and want to throw in an extra $5,000 for repairs.

With a cash-out refinance, you take a portion of your equity and then add what you’ve taken out onto your new mortgage principle. This means your new mortgage would be worth $220,000 – the original $200,000 you owed on the home plus the $15,000 you need for the condo, and the $5,000 for repairs. You receive the $20,000 in cash from your lender a few days after closing.

Upgrade to a Bigger Home

One of the biggest advantages in having equity through homeownership, so when its time to move you aren't stuck draining your finances for a down payment or repairs. Let's say you paid $250,000 for your first home with two bedrooms. But now you have a growing family and need something a little bigger. As you paid your mortgage you managed to pay off $20,000 of your principal, and your home has appreciated about 3.5% per year the last 5 years, putting its market value at $297,000. When you sell your home you'll walk away with just over $40,000 in your pocket after closing costs on your home sale.

That's $40,000 to use all as a down payment on a bigger house or you can set some aside to use as funds for moving, repairs, or even a vacation!

Use Your HELOC for Other Expenses

A HELOC isn't just good for consolidating debt, it can be used for other expenses such as: emergency medical expenses, a sabbatical, a vacation, new car, or maybe its time to go back and get that masters degree you always dreamed about! Your HELOC could also be used to help start a business, invest,

Many lenders even offer interest only payment options during the draw period. This means you can keep your payments low by paying all the interest up front and focus on paying the principal later on.

Closing Thoughts

When you buy a home you aren't just buying a place to store your things or host Stranger Things watch parties. You're making the biggest investment you'll likely ever make. And as with all investments you want your money to work for you. If you've been paying on your home diligently or your home has gone up in value (like pretty much anyone who owns property in these pandemic times), then it may be time to use that equity to your advantage. The fact is it may take decades for the average family to save up for something like a roof replacement or a major remodel like a kitchen. And taking care of those things doesn't have to mean entering into high interest debt.

Is it time to sell? Or are you looking to diversify or build your portfolio with a real estate purchase? We can help you find homes for sale in Tampa! We can also help you find off market deals if that's more your speed. And if you need property management for your new investment look no further.