How to Build Generational Wealth With Home Equity

Every home purchase is a glimpse into the future. It will be a place in which new memories are formed, families grow, and wealth can be built. As a homeowner, your house can become your greatest asset in building a future for your children, grandchildren, and generations to come. But it all starts with the choices you make today and how you choose to utilize the valuable financial tool you start establishing as soon as you buy a house—home equity.

In this article, we will review what home equity is and how it can help you become the founder of your family’s generational wealth.

What is home equity?

Home equity is the portion of your property that you own outright. You start building equity in your home with your down payment, then continue building it as you pay off your mortgage. Here is the equation used to calculate home equity:

Home’s market value – current mortgage balance = Home equity

Along with paying down your mortgage balance, you can also increase equity by increasing your home’s value. Making home improvements and repairs will help raise its market value, which is why house flipping can be a lucrative investment (if you know what you are doing).

While upgrading your home is not necessarily required to see its value rise, improvements are a good way to avoid seeing your property value depreciate over time. In order to build wealth for future generations, it is important to know the different factors that impact a home’s appreciation.

How does real estate appreciation work?

Appreciation is when a home’s value increases as time goes on. However, homes must be regularly maintained and carefully renovated in order to avoid depreciation. Appreciation rates are also variable and subject to fluctuate based on changes in the housing market. However, even though the housing market has cyclical ups and downs, you are unlikely to see the real estate market bottom out to zero value.

Home equity and appreciation work hand in hand. Even if you pay off your mortgage completely, it is still important to take measures to keep your property appreciating in order to turn a profit should you decide to sell later on or tap into your equity for funds. However, just because you have equity in your home does not automatically mean you have acquired generational wealth status.  

What is generational wealth?

The term generational wealth alludes to any financial assets and funds that you are able to pass down to the next generations. For instance, any inheritance someone acquires after the death of a parent or grandparent is considered generational wealth. These assets or inheritances can take many forms, including:

• Stocks, bonds, or other investments

• Family businesses

• Financial accounts and portfolios

• Art, jewelry, and other precious materials

Unlike some of these other assets, home equity and value are built gradually. This can make it an ideal long-term strategy for accumulating wealth that can be passed down. The trick is resisting the temptation to borrow against the equity you are accruing.

If one of your goals when buying a home is to build an asset you can pass on, it is also important to invest in a home that is ideally located in an area that will grow in value as time goes on. For example, you may be interested in a house on the beach. But as the climate changes, you or your children may have to deal with property erosion that brings down its value over time.

Renting vs. owning your home

For some people, committing to homeownership does work for their lifestyle. However, if you are renting your home then it becomes vital to invest wisely and find other sources for generating wealth. It is important to remember that when you rent you are not building your own equity. You also will not have a home to pass on to your children and grandchildren.

Building generational wealth through homeownership does require dedication, because you need to live in your home long enough to build equity, but every mortgage payment you make is an investment in your financial future.

How you can use home equity to build generational wealth

There are a few different ways that home equity can assist you in your efforts to generate more wealth for the next generation. Real estate is one of the pillars of wealth, but only when used intentionally. It is important that you are thinking of the future, not just current circumstances. Real estate is an asset that can appreciate over time, but you will also need to have a strategy in place to ensure that your home (and the associated wealth) is passed on as efficiently as possible.

Here are some strategies for homeowners who want to help secure the financial futures of successive generations:

1. Setting up property inheritance with a will or death deed. If you want your children or heirs to inherit your home, then you will have to outline the details in your will or a death deed. These documents will outline who the beneficiaries of the property are and can include added instructions on the distribution of your assets. However, it is worth noting that wills must proceed through probate court to become official which involves time and can be costly.

2. Tapping into home equity for education funding. Another way homeowners can assist future generations is turning equity into funds for education expenses. That way your children or grandchildren will be set up to excel in their given career without the weight of student loans holding them back from their financial goals.

3. Establishing a trust and real estate plan. A trust is an incredibly tax-efficient way to pass your assets on to the next generation. You can also include your wishes for how the distribution is handled.

Your home is a central place for providing your family with security. Multi-generational living accommodations can not only reduce expenses for everyone, but offers your children the opportunity to focus on saving up their own funds for the future. A home is also a good safety net in the event of economic hardships.

Home is where the heart is, and it is also your greatest financial tool. It all comes down to how you want to use it—whether you want to tap into your equity for funds or pass wealth on to future generations. The choices are up to you, but do not hesitate to reach out to your lender or a financial expert to discuss your goals and options.