How buying a home in Tacoma builds equity and why that benefits you
What is equity?
Home equity is your current home value minus your loan balance. To obtain your home value, there are a few methods.
For the most accurate and precise valuation, a licensed Tacoma appraiser will determine your home value when you:
Sell your home and the buyer is using a loan to purchase it; or
Pull out equity from your home using various methods (see below).
you hire an appraiser independently
To determine your home’s market value more informally, you can use other methods to estimate the value such as:
Ask a local Tacoma realtor with experience in this market to “pull comps”, which involves looking at recently sold data on comparable homes to give you an estimated value. We recommend reaching out to Laura Anderson for help here.
Use a price estimator tool like Zillow or Realtor.com although these tend to be only data driven and less reliable or precise, as they don’t take in local factors relevant to Tacoma.
Now that you have an estimated value of your home, simply subtract any mortgage balances or debts secured by your home. This is your equity.
How is equity built?
Now that you know what equity is, it’s essential to understand how equity is built. Sometimes referred to as “the four wealth builders,” there are four components to building equity.
Mortgage pay down. Perhaps the most easy to understand, as you pay a mortgage payment to your lender each month, some of that payment goes toward your principal balance which, in turn, increases your equity.
Appreciation. This is a controversial one and deserves its own article (or several) to dissect. It also highly depends on your location. Remember, real estate is “location, location, location.” For purposes of understanding equity growth, home values historically increase over time.
Taxes. Always consult an accountant to better understand your tax situation, but for simplicity, homeowners are able to deduct various mortgage-related expenses (interest, insurance, etc.).
Cash Flow. Cash flow is the fourth if/when you decide to rent your home or buy an investment property. But for this article, we are assuming you’re living in the home. So this does not apply here.
The Benefits of Home Equity in Tacoma
Now that we know what equity is and how we get it, we can talk about the benefits of having home equity.
Again, we are assuming you’re living in the home as your residence. Lenders and accountants often refer to this as your primary home, There are several benefits and ways to use the equity in a primary home.
The most common use of equity is building wealth. Every year for the past decade Tacoma homes have risen somewhere between 10-20% annually, making the purchase of a home the highest returning investment for most Tacoma Home owners. This is why home equity appreciation is one of the best (and easiest ways) to build wealth for the average person.
You could sell it. This is probably the most obvious way to turn that equity into cash. Keep in mind, each state has different rules about paying taxes on real estate profit (capital gains). Determining the profit and determining the taxable amount are complicated and best handled by an experienced real estate accountant.
Keep your home and “pull money out.” There are a few different ways to do this:
Home Equity Line of Credit (HELOC). This is a revolving line of credit with a variable interest rate that is secured by your home. Your lender will allow you to borrow a certain percentage of the equity.
Home Equity Loan. Like a HELOC, when considering a home equity loan, your lender will look at your equity amount, credit score, and debt-to-income ratio. It’s also secured by your home as collateral. However, a home equity loan, often called a “second mortgage” is different from a HELOC in that it’s usually a fixed-rate and lump sum loan.
Cash-out Refinance. A cash-out refinance is obtaining a new loan entirely. This is done by borrowing a new, higher loan, paying off the old loan, and pocketing the rest in cash. Unlike a home equity loan, you don’t add a second mortgage but rather replace the first one.
When looking at options to build or use home equity, It’s important to consult with a real estate professional to develop the best plan for your situation. We would love to set you up with a knowledgeable and friendly Tacoma real estate agent, just shoot us a message here.