Back to School: Building Wealth Through Homeownership

A high loan-to-value loan still may be beneficial for some borrowers

Insider

Contributing Writer

Summer is coming to an end and soon we’re heading back to school. Once we’re all done mourning the loss of our vacations and slow, sunny days, it’s time to brush up on something many have lost sight of over the past several months. Despite an increase in both rates and home prices, homeownership is still the biggest opportunity to build wealth — for anyone.

Let’s get back in the classroom, go through our favorite subjects, and explore how you can help your borrowers begin building wealth, despite today’s market challenges.

Math: Home Prices

You don’t need a calculator to see that home prices are high. According to The Hill, home prices are up more than 30% from 2020 and almost 16% in the last year alone. The median home price has now reached $428,700 — a significant jump from the $329,000 we saw just two years ago. You don’t have to be a mathematician to see home prices have made a huge jump over a relatively short amount of time.

It’s easy to think that borrowers should wait for prices to go down, but, while the price surge may slow, prices likely won’t return to those low, pre-pandemic levels that everyone is hoping for. Worst case scenario, they could potentially continue to get higher.

History: Wealth Building over Time

Looking back at how families have historically built wealth, homeownership is arguably the best investment tool one could use. Any good historian knows that important lessons can be learned from our past, so let’s look back at how homes have built equity.

A report from the National Association of Realtors demonstrates just how much homeowners are actually making over time, through building equity. The report notes, “Homeowners who purchased a typical single-family existing-home 30 years ago at the median sales price of $103,333 with a 10% down payment loan and who sold the property at the median sales price of $357,700 in 2021 Q2 accumulated housing wealth of $349,258, of which 73% is due to price appreciation.”

The report goes on to show how much the average home earns in equity over different periods of time. In just 5 years, a home can earn well over $100,000 in equity, this amount nearly doubles over a 20-year period and reaches nearly $350,000 in equity over a 30-year period. While most buyers may think that building equity takes decades and decades, homes can actually help build wealth in a relatively short amount of time.

With this in mind, a high loan-to-value (LTV) loan still may be beneficial for some borrowers, as it could take years to save for their down payment, when in reality, they could potentially be building that — and probably more — in equity. It is so important to know when it makes sense to wait and when it makes sense to get started with building wealth. And, of course, I’m a big fan of strategically using mortgage insurance!

Additionally, the U.S. Census Bureau found that homeowners’ median wealth was a staggering 89 times higher than that of renters. The two biggest factors in the wealth gap were home equity and retirement accounts. 63% percent of the net wealth of 80% of Americans is in their primary home, according to home.com.

Despite an increase in both rates and home prices, homeownership is still the biggest opportunity to build wealth — for anyone.

Art: Matching Borrowers with the Best Options

The fact of the matter is, borrowers have plenty of options for dealing with affordability issues, and they are more important now than they’ve ever been. There’s an art to connecting your borrowers with the product that best fits their unique needs. Lenders must know the options available and which borrowers are most suitable so they can guide them through this challenging market. In the same way artists work with different mediums like paints, pencils, or pastels, lenders must work with different products and programs to create a masterpiece for each unique borrower.

When creating that masterpiece, there are some mediums that you should consider.

Agency Loans: Both Fannie Mae and Freddie Mac offer low down payment options through HomeReady and Home Possible, respectively.

Local Housing Finance Agencies (HFAs): Check with your secondary market departments as there may be state, county, or city for opportunities with an HFA. Local HFAs will vary, but many offer assistance with down payments or closing costs.

U.S. Department of Agriculture (USDA): Depending on where your borrower is looking to buy, the USDA also offers homebuyer assistance in rural areas.

Federal Housing Administration (FHA) and Veterans Administration (VA): Of course, the FHA and VA also offer affordable options to help eligible homebuyers.

There’s an art to connecting your borrowers with the product that best fits their unique needs.

Hit the Books

So, it’s time to get back to school and brush up on the many options you can offer to help your borrowers start building wealth. Once you’ve studied up, think of yourself as a tutor and share that knowledge with your borrowers so they are educated and empowered to build a better financial future.