Building Wealth with Home Equity

Strategies for Financial Growth 

Being a homeowner has a lot of perks. Along with appreciation, you’ll gain access to numerous tax benefits that aren’t available when renting. The main advantage of owning a home is that you can build equity with each mortgage payment you make. If you want to implement strategies that will help you build wealth, growing your equity needs to be at the top of your list. In this guide, you’ll discover the role that equity has in wealth building. 

How Does Equity Work? 

Home equity is the amount of your property that you have full ownership of. It’s the difference between the value of your home and your outstanding mortgage debt. Let’s say you purchased a $300,000 home with a $60,000 down payment. In this scenario, the mortgage loan would amount to $240,000. If you’ve since paid off $120,000 of the mortgage loan, your equity would be $180,000 plus appreciation.  

Home equity can increase when your property value rises and your mortgage debt decreases. Over time, you’ll be able to build your wealth by simply making your payments when they’re due. The equity you gain is an asset that you can sell for profit or borrow against.  

To bolster your wealth-building strategy, you can choose to tap into your home equity. There are several options at your disposal, the primary of which include a home equity line of credit (HELOC) and a home equity loan. You can also apply for a cash-out refinance on your primary mortgage, which allows you to gain access to most of the equity you’ve built up.  

While generational wealth can take the form of stocks, bonds, a family business, and tangible assets, growing your equity may be the easiest way to build your wealth. However, you must use your equity wisely. Let’s say you take out a HELOC or home equity loan. While this strategy will reduce your equity on a short-term basis, it can help you increase your wealth if you use the money to make improvements that boost the value of your property.  

Using Your Equity to Increase Your Wealth 

From investing in real estate to paying off remaining debt, there are numerous things you can do to build wealth with equity. 

Invest in Real Estate 

Whether you apply for a cash-out refinance or home equity loan, you can use your equity to invest in real estate. Additional real estate investments can help you build income streams, earn better tax benefits, and gain long-term appreciation. Consider real estate investments like: 

  • Real estate investment trusts (REITs): An REIT is a company that owns, manages, and finances rental real estate. You don’t need to use a lot of your equity to invest in an REIT. 
  • Vacation rentals: Buying a property in a location that brings in a lot of tourism can lead to high profits from short-term rentals. 
  • Rental properties: Bringing in rental income from tenants allows you to earn a consistent cash flow that can help you generate long-term wealth. 
  • Flipping houses: This strategy involves buying dilapidated homes and renovating them, after which you can sell them for a profit. 

Increase Your Retirement Income 

When you’re building wealth, you can use the equity in your home to increase your retirement income. Making wise investments can help you yield returns that bolster your long-term finances. If you’re able to make investments early on, you can benefit from compound interest. You’ll obtain compound interest when you reinvest your earnings to receive additional income.  

Create or Scale a Business 

You can also use your equity to create or scale a business, which can help you grow your wealth to even greater heights. While it can take years to start earning a profit from your business, it can pay dividends if you stick with it. Before you use your home equity to start or scale a business, keep the following tips in mind: 

  • Don’t use a business structure, such as a sole proprietorship, that will hold you personally liable for the company’s losses. 
  • Set reasonable income projections that allow you to pay off your property-secured debt. 
  • Obtain liability and business insurance. 
  • Establish clear financial goals. 

Build Additional Equity 

You can also increase your wealth by building additional equity with improvements and upgrades. The right upgrades can increase the value of your home, which will boost the amount of equity you have access to. While remodeling doesn’t provide a 100% return on your investment, it should make your home more comfortable to live in and help you increase your equity. The renovations with the best ROI include the following: 

  • Garage door replacement: Cost – $4,513, Value Increase – $8,751 
  • Entry door replacement: Cost – $2,355, Value Increase – $4,430 
  • Manufactured stone veneer: Cost – $11,287, Value Increase – $17,291 
  • Small kitchen remodel: Cost – $27,492, Value Increase – $26,406 

Pay Off Remaining Debt 

Debt negatively impacts your wealth by effectively reducing the amount of money you have access to. Your wealth can have more value if you use your equity to pay off existing debts. Focus on reducing or eliminating high-interest debt. If you have debts with higher interest rates than an equity-based loan, you’ll save a considerable amount of money by using the loan to pay off your debts. You can create wealth by eliminating the following types of debt: 

  • Car loans 
  • Private student loans 
  • Credit card debt 
  • Personal loans 

If you apply for a home equity loan that has a low APR, you can use it to consolidate debt.  

When cultivating a comprehensive wealth-building strategy, equity should be the cornerstone of it. Your home is an asset that appreciates and can be passed down to beneficiaries, which will give them access to your equity. If you’re in the market to buy a home in Indiana, call BuyHouseEz to learn more about how to finance this purchase.

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