A key determining factor of someone’s ability to build wealth in America is homeownership, and as retirement faces a mounting series of challenges, that ability to build wealth can factor crucially to an older individual’s retirement plans. Employing the housing asset can be an important piece of building wealth even more for people of color, according to data from the Federal Reserve, which is why its use can make a big difference to someone’s financial future.
This is according to columnists Amy Fontinelle and Mike Cetera in a new column at Forbes, where the pair breaks down why home equity is so important to someone’s finances and how it can be strategically used when needed.
“The longer you’ve had your mortgage, the faster you build equity with each monthly payment,” the duo writes. “If you review a mortgage amortization schedule, you’ll see that most of your payment goes toward interest at the beginning of your loan term. With each payment, you owe less money and accumulate less interest. More of your next payment then goes toward your principal.”
Using home equity isn’t an abundantly common practice in the world of lending, but can be an important tool for larger expenses that someone may want to pursue, the pair writes.
“Home equity is a valuable resource. If you borrow against it, you can technically use the money however you want,” the column reads. “However, it’s common to use it for larger expenses like home renovations, higher education, debt consolidation or relocating.”
One potentially beneficial way someone can use their home equity is through the use of a reverse mortgage, and the information about the product category is presented in a pretty neutral way.
“Homeowners who are at least 62 years old and have a low or no mortgage balance can use a reverse mortgage,” the column reads. “These mortgages let you borrow against your considerable equity and get a loan you may not ever repay yourself. Instead, when you move or die, your heirs will list and sell the property to repay the reverse mortgage amount.”
Other ways in which home equity can be used in a financial transaction is with a home equity line of credit (HELOC); a home equity loan; a cash-out refinance; a down payment on a new home purchase; or through a sale for use as a rental property.
Among some potential advantages of using home equity, the pair details that since the loan is secured by the property, a lower interest rate can be secured. The money can also be used for nearly any purpose; interest could be tax-deductible if itemized deductions are used; and a sizable portion of home equity can be borrowed depending on the level of equity and other factors (including age for reverse mortgage borrowers).
Potential disadvantages of using home equity, according to the column, include the possibility of losing the home if a borrower defaults on a home equity loan; loan fees and interest needing to be paid in order to access equity; and loan qualification requirements could make it difficult to tap into the equity particularly for those with an immediate need.
Read the column at Forbes Advisor.