Buying a house is expensive, which leads some people to wonder whether it's worth buying or if they should keep renting. However, the long-term benefits of owning a home can help you build wealth for yourself and future generations of your family. According to the most recent Federal Reserve data, the median net worth of homeowner households was $396,200 in 2022, nearly 40 times the median net worth of $10,400 for renter households.
Accumulating wealth: 5 ways to build home equity
"Home equity" refers to the difference between the value of your home and the outstanding balance on your mortgage loan. For example, if your home is worth $550,000 and you owe $400,000, your equity is $150,000.
You build home equity as you pay down your balance. Your equity also changes over time based on the market value of your property.
The more equity you have, the higher your net worth. And if you sell the home, having more equity means you will keep more of the proceeds. There are several ways to increase your home equity.
1. Make a bigger down payment
If you make a larger down payment and borrow less to buy your home, you'll have more equity right away. For example, if you make a 5% down payment, you'll start out with 5% equity in your home. But if you put 20% down, you have 20% equity right off the bat.
2. Make regular payments
Unlike with renting, you gradually build equity as you make monthly payments and reduce your loan balance.
In the early years of your mortgage, more of your payment goes to interest than principal — but over time, that shifts. Even as your payment on a fixed-rate loan stays the same, a larger portion of the payment goes toward the principal in later years.
3. Make extra payments
Whether you pay extra on your principal balance monthly, send in an occasional lump sum, or make biweekly mortgage payments, you can gain equity faster by reducing your balance.
4. Make smart home improvements
While not every investment in your home automatically increases its market value, generally, when you make home improvements, you'll raise the value of your home.
For example, if you renovate an outdated kitchen or finish the basement or attic, the next buyer will likely pay more for your property than if you hadn't made those changes. You may want to talk to a real estate agent about which improvements are worth making based on your neighborhood and homes similar to yours. This way, you can get the most value for your investment.
5. Rely on rising property values
Home values fluctuate according to various factors, including the overall economy's performance. However, house values generally rise over long periods.
For example, according to the Federal Housing Finance Agency, home prices rose 4.5% from January 1991 to October 2023 and 7.5% between January 2012 and October 2023. As you pay down your mortgage and your home value increases, you can build equity and household wealth.
Financial benefits of homeownership
Although there's no question that buying and maintaining a home costs a significant amount of money, there are financial advantages to homeownership. It's important to remember that these help you increase your net worth. Here are some common financial benefits of homeownership.
Stable monthly payments. If you choose a fixed-rate mortgage, your principal and interest will remain the same until you refinance, sell the house, or pay off the loan entirely. The only expenses you need to worry about increasing are your property taxes and homeowners insurance premiums. When you rent, your monthly housing payment can change whenever your lease ends. A stable principal and interest payment make financial planning easier.
Tax breaks. If you itemize deductions on your federal income tax return, you may be able to deduct interest payments on your mortgage. While this is the most popular tax benefit for homeowners, you may qualify for several others.
Eliminate your mortgage payment. Once you pay off your total mortgage balance, you will own your property free and clear. You still need to pay taxes, insurance, and maintenance costs, but eliminating a mortgage payment typically makes a substantial difference to your cash flow.
Borrowing power. As you build home equity, you'll have the option to borrow some of it to pay for home improvements or other expenses. You can do this with a home equity loan, home equity line of credit (HELOC), or cash-out refinance. You won't immediately make money with these types of mortgages, but taking equity out of your home can help you build wealth when you use the funds to pay off high-interest debt that's dragging you down or renovate your home so it sells for more later.
Rental income. Whether you rent out a portion of your home or move out and keep the property as an investment, owning real estate offers the potential to generate rental income.
Generational wealth building. An important element of homeownership is the ability to use your real estate to improve the financial stability of your family. You can borrow from your home equity to help family members buy their own home with down payment assistance or use some of your equity to invest in their education to improve their future prospects. Your family can also inherit your home after you die and either sell it or live there themselves.
Buying a house to build wealth FAQs
Do you need to own a house to build wealth?
No, homeownership isn't a requirement of building wealth, but it is a common path to increasing your net worth. Renters who invest their money in other ways can also build wealth.
How long do you need to own a house to build wealth?
Since buying a house requires a down payment and closing costs, many financial experts recommend you keep your house at least long enough to cover the expenses of buying and selling. Experts generally suggest that you keep a house for at least five years. However, it depends on whether property values are rising in your area. You could sell for a profit faster if home prices are going up quickly, or it could take longer than five years.
Can you build wealth with a starter home?
Whether you buy a condo, a townhouse, or a smaller house that costs less than the average home in your community, you can still start climbing the homeownership ladder. Typically, by buying a starter home and paying down the mortgage while the home's value appreciates, you can sell it in a few years and use the proceeds from that sale toward your next home. In the meantime, you may also qualify for tax deductions.
