Brooklyn Homeownership Is A Step Toward Wealth Building
Brooklyn homeownership is a foundational step to building your wealth.
Wealth building simply refers to increasing the net value of your total assets. Wealth building over time is one of the advantages of homeownership.
The calculation of net worth is simple. You calculate it by subtracting the amount of money you owe (liabilities) from the amount of money your possessions are worth (assets.)
Net Worth = Assets – Liabilities
Brooklyn homeownership can help you build wealth in two ways.
First, you build equity by paying down your mortgage.
A percentage of each mortgage payment goes towards a reduction in the total amount owed. Typically, the first few years of mortgage payments apply to interest, not the principal. However, more and more of each payment is applied to the outstanding principal amount as time passes. Before you know it, your $300,000 loan is down to $50,000, and you’ve gained $250,000 in wealth.
The second way to build wealth through Brooklyn homeownership is appreciation.
Each year, the value of your home will increase or decrease slightly based on market prices. However, over time, real estate has consistently appreciated.
Home prices rose 18% in 2021, according to CoreLogic’s Home Price Index. Bank of America predicts a 10% appreciation rate through 2022, even with the expected interest rate increases.
Due to the unprecedented real estate market of 2021, home values rose thanks to low housing supply and high buyer demand. Unfortunately, there were not enough homes to meet this high buyer interest, so bidding wars began driving home prices up. The rising prices mean your home is worth more in today’s market when you own a home. And as home values climb, your equity does too.
How Rising Equity Impacts You
In addition to building your overall net worth, equity can also help you achieve other goals like buying your next home. It works like this: when you sell your house, the equity you built up comes back to you in the sale.
In a market where you’re gaining so much equity, it may be just what you need to cover a significant portion – if not all – of the down payment on your next home. So, if you’ve been holding off on selling and worried about being priced out of your next home because of today’s home price appreciation, rest assured your equity can help fuel your move.
As the mortgage interest rates begin to climb, buyers will be more eager to purchase now. So if you are considering selling, now is time to take advantage of the lack of inventory available to buyers.
Equity can be a real game-changer if you’re planning to make a move.
Wealth Building Example
Let’s see a simple demonstration of how advantageous Brooklyn homeownership can be. Assume you bought a home in 2005 for $400,000 and, for simple mathematics, paid nothing for a downpayment. Over the next ten years, your mortgage payments reduce the outstanding mortgage by $100,000 and the home increases in value to $600,000. The value of your home as a net asset has grown to $300,000 [$600,000 minus $300,000 mortgage balance]! You would have missed out on $300,000 in wealth if you had rented during this period.
Historically, homeownership is one of the best ways for families to build wealth. However, if you don’t currently own a home, you may want to consider purchasing now.
As inflation rises, the link between financial security and homeownership will become especially important. As Leslie Rouda Smith, President of the National Association of Realtors (NAR), says:
“Homeownership is rewarding in so many ways and can serve as a vital component in achieving financial stability.”
Owning a Home Is a Building Block for Financial Success
Recently NAR conducted a report that details several homeownership trends and statistics. This information includes the difference between the net worth of homeowners and renters. The report stated that the net worth of a homeowner was about $300,000, while the wealth of a renter was about $8,000 in 2021. Therefore, a homeowner’s net worth is roughly 40 times higher than a renter’s. This report shows how owning a home can be a key factor when building your overall net worth.
Is the gap between a homeowner’s net worth and a renter’s surprising to you?
The net worth gap between owners and renters primarily exists because homeowners build equity. As a homeowner, your equity grows as your home appreciates in value and you make your mortgage payments each month.
In other words, when you own your home, you have the benefit of your mortgage payment acting as a contribution to a forced savings account. And when you sell, any equity you’ve built up comes back to you. But, as a renter, you’ll never see a return on the money you pay out in rent every month.
Additionally, homeownership provides you with a fixed monthly payment that will not increase with a fixed-rate mortgage. Renters expect an increase from year to year. Each annual increase affects your available cash for investing or saving.
If you are interested in buying a home, you need to ask yourself a few questions.
How much home can you afford?
You need to meet with a mortgage lender to obtain a prequalification letter. The lender will review your financial information to determine your maximum mortgage amount. Your lender can explain the different mortgage options.
Where will you find the money?
Mortgages come at a cost. You most likely will need to have accessible cash for some portion of your purchase. Hopefully, you are actively saving for your home purchase. If you own a home, you may be able to tap into the equity to purchase a new home. In addition, some mortgages will allow you to receive gift money from a relative if you do not have adequate savings.
How can you continue to save money after buying?
Your lender will provide you with an amortization table that shows the total cost of the mortgage for the loan duration. It can be shocking to see the amount you will pay over time due to interest. You can cut the cost by paying your mortgage off early. Making additional payments toward your principal will save you on additional interest costs.
A biweekly mortgage instead of monthly can also save you money, Or simply add an extra payment each year, for a total of 13 payments and designate that it is to apply to your principal balance. This tactic could cut your mortgage by several years.
If you are interested in reducing the length of your home mortgage, speak with your lender and financial planner to see what will work best to meet your financial goals.
If you are a first-time homebuyer, you can find some helpful information in this previous blog post.
According to a recent Gallup Poll, real estate remains ranked top in America’s opinion of the best long-term investments since 2013. One significant advantage to Brooklyn homeownership, as opposed to other investment vehicles, is that you also have a place to live.
Having a trusted real estate professional to help you, whether buying or selling, is crucial in this current real estate climate. In addition, an agent who knows the area and market well can be a valuable asset to your wealth-building team.
Contact me, Charles D’Alessandro, your Brooklyn Real Estate Agent with Fillmore Real Estate. As a Brooklyn real estate agent with over 30 years of experience, I can help buyers and sellers achieve their real estate goals. Reach me by phone at (718) 253-9500 ext. 1901 or by email at [email protected]
