Freddie Mac makes it possible for the U.S. housing market to flourish. It basically purchases loans from lenders to help them have the funds available to provide more mortgage to homebuyers. Since the state of the housing market has a lot to do with how much they buy from lenders and how much lenders can lend to people, they seek to fuel the housing market with worthwhile information in favor of buying and selling homes. Recently, Freddie Mac offered some great support to the benefits of owning a home— equity.
What Is Home Equity?
Equity in your home is calculated by looking at the appraised value of your home and how much mortgage you have left to pay. For example, if your home is appraised for $200,000, and you have only $150,000 left to pay on your home, you have made $50,000 on the equity of your home.
Sometimes, when the housing market improves, homeowners end up benefiting with more equity than they have earned through paying down their mortgage. For example, if the same house goes up in value by $50,000 or more, the homeowner will have $100,000 in equity.
As you pay on your mortgage, the equity increases. As the housing market improves, the equity increases. Equity can be used in a couple of different ways.
- It can be used in a loan to pay for purchases.
- It can also be used as a savings account. When the house sells, you can get the difference of the appraised value or the home and how much you’ve already paid on the mortgage. This could lead to a significant gain in your savings account.
What Freddie Mac Says about the Power of Home Equity
While you may understand how home equity works now, most people do not know how important it is to their financial future. Freddie Mac explained this in the following scenario:
As you can see, this makes owning a home a great investment, because after seven years, the owner made $67,518. You can’t get that type of return on investment for many investment opportunities.
A Merrill Lynch study with Age Wave further shows the power of home equity in its analysis of how homeowners of different ages can benefit from it. The following chart shows how much average equity homeowners have by age.
As people approach retirement, they can have an average of $212,800 in equity saved in their home. If this equity is not tied up in a loan used in the past, that can be savings to be used to live on during retirement. Many people are not able to get that type of savings from traditional retirement accounts, so that makes owning an even bigger perk.
To drive it home, Freddie Mac made this comparison with renting:
Now, if you continued to rent, and made the same payment of $684.03 per month, you’d have zero equity and no means to build it. Building equity is a critical part of home ownership and can help you create financial stability.
This isn’t a sales pitch to buy a home—it’s the reality of home ownership. If you’re renting, you may want to start crunching the numbers to find out how you can buy. Your financial future may depend on it.