In following up on last week’s blog about the benefits of owning over renting, one of the benefits of being a homeowner is that you build equity over time. By selling your house, that equity can be used toward purchasing your next home. But before you can put it to use, you should understand exactly what equity is and how it grows. Bankrate explains it like this:
“Home equity is the portion of your home you’ve paid off – in other words, your stake in the property as opposed to the lender’s. In practical terms, home equity is the appraised value of your home minus any outstanding mortgage and loan balances.”
Majority of Americans Have a Large Amount of Equity
If you’ve owned your home for a while, you’ve likely built up some equity – and you may not even realize how much. Based on data from the U.S. Census Bureau and ATTOM, the majority of Americans have a substantial amount of equity right now (see graph below):
And having such large amounts of equity is a benefit to homeowners in more ways than one. Rick Sharga, Executive Vice President of Market Intelligence at ATTOM, explains:
“Record levels of home equity provide security for millions of families, and minimize the chance of another housing market crash like the one we saw in 2008.”
Over time, your home equity grows. In addition to providing financial stability while you own your house, when you’re ready to sell it, that money could go a long way toward paying for your next home.
The Importance of Home Equity in Retirement Planning
We often discuss the difference in family wealth between homeowner households and renter households. Much of that difference is the result of the equity buildup that homeowners experience over the time that they own their home. In a 2017 report released by the nonpartisan Employee Benefit Research Institute (EBRI), they reveal how valuable equity can be in retirement planning.
Craig Copeland, Senior Research Associate at EBRI, authored the 2017 report, “Importance of Individual Account Retirement Plans and Home Equity In Family Total Wealth”, in which he reveals:
“Individual account retirement plan assets, plus home equity, represent almost all of what families have to use for retirement expenses outside of Social Security and traditional pensions. Those families without individual account assets typically have very low overall assets, so they have almost nothing to draw from for retirement expenses.”
The report echoed the findings of a working paper, Home Equity Patterns among Older American Households, authored by Barbara Butrica and Stipica Mudrazija of Urban Institute. Fannie Mae highlighted these findings for their blog The Home Story this past winter, quoting Butrica and Mudrazija:
“For most adults near traditional retirement age, a home is their most valuable asset — dwarfing retirement accounts, other financial assets, and other nonfinancial assets. Although relatively few retirees tap into their home equity, having it provides financial security… In fact, many retirement security experts argue that the conventional three-legged stool of retirement resources — Social Security, pensions, and savings — is incomplete because it ignores the home.”
USAToday interviewed two area experts to comment on the EBRI report. Randy Bruns, a private wealth adviser with HighPoint Planning Partners, agreed with the findings:
“Social Security and home equity are major pieces of the retirement puzzle.”
Wade Pfau, Professor of Retirement Income at The American College of Financial Services and author of “Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement,” said having the equity without a plan to use it won’t help:
“Home equity is a very important asset for American retirees, and so it is important to think about how to make best use of home equity in retirement planning.”
And while these comments and reports may be older, they continue to echo report findings from past decades, too. Home equity remains a large piece of peoples’ retirement picture and can be used in flexible ways.
By selling your house and leveraging your equity, it can be easier to pay for your next home. Or, you might be able to leverage your equity for an investment purchase, home improvement project or elimination your high-interest debt or a reverse mortgage as a part of retirement planning. Right now, Your@Home Team is finishing up with our first-quarter client project, “Your Annual Equity Analysis”. If you are curious about your home equity, let’s connect today so you can find out how much home equity you have and start planning the best timing for your next move or the best utilization of your home’s equity!