Just when it looked like mortgage rates would return to their 20-year peak of 7.08% — a high last experienced in November, 2022 — the U.S. housing market took a turn in the buyers’ favor.
After weeks of upward momentum, the average 30-year fixed mortgage rate pulled back to 6.42% this week.
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A series of bank collapses put significant downward pressure on rates, benefitting borrowers in the short term, according to Freddie Mac’s chief economist Sam Khater.
But with the average homebuyer’s monthly mortgage payment at $2,556, and widespread uncertainty about the health of the U.S. economy, homebuying is expected to remain cool in the near future.
If you’re one of the millions of Americans who feels priced out of the housing market, here are three ways to use your current home to build wealth.
Become a landlord
Many homeowners secured low fixed-mortgage rates of 3-4% in 2020 and 2021, when the COVID-19 pandemic drove borrowing costs to historic lows.
Now, as mortgage rates and house prices are near record highs, some homeowners are so desperate to hold onto their low mortgage rates that they’re choosing not to sell their properties — even if they’d like to.
Instead, some are becoming “accidental landlords”, according to Fortune, and are leasing or renting out properties while they wait for a better time to sell — and buy something else when they can get a more reasonable mortgage rate.
There are actually several benefits to renting out your property.
The rental income you generate can be set aside for a future down payment or to add to your retirement nest egg.
When you hold onto your property, there’s always a chance that the market could improve and the value of your home might appreciate — helping you to make a profit when you do eventually sell.
If the hassles associated with becoming a landlord and managing a property don’t appeal to you, but you are still interested in real estate investments, there are other options.
You can consider buying into real estate investment trusts (REITs) or you can make passive income by investing in properties through a number of new online platforms without needing to take on the mantle of landlord.
Read more: Here’s how much the average American 60-year-old holds in retirement savings — how does your nest egg compare?
Stay put, build equity
By staying in your home and putting more money toward paying off your mortgage, you can build equity — which comes with many benefits.
Home equity is the difference between how much your home is worth and how much you owe on your mortgage. For instance, if your home is worth $600,000 and you owe $200,000 on your mortgage, then your home equity would be $400,000.
U.S. homeowners with mortgages saw their equity increase by a total of $1 trillion in 2022, a gain of 7.3% year over year, according to the CoreLogic Homeowner Equity Insights report.
The report showed that In the fourth quarter of 2022, the average borrower earned about $14,300 in equity year over year.
There are multiple benefits to staying put and building home equity in your current home. For instance, you’ll come away with more cash when you do eventually sell.
You can use those profits to increase your down payment and get better mortgage terms for your next dream home. Or you could use that cash to venture into real estate investing — the options are endless.
As you build home equity, you become eligible for a home equity line of credit (HELOC). A HELOC can give you peace of mind if you run into financial trouble during an economic downturn because it generally gives you access to cash at a lower rate.
With a HELOC, a lender will approve you for a specific amount of money — determined by the value of your home and your credit score — which you can use for home renovations, large purchases and debt repayment, among other things.
Renovate to increase your home’s value
If you feel like the current market is binding you to your low fixed-rate mortgage, why not use this time to renovate the basement or build that dream kitchen you’ve always wanted?
A recent survey by Hanover Insurance Group found that 28% of respondents looking to buy a home in 2022 had to stay in their current living situation for longer than expected due to market conditions.
The survey also found that 61% of homeowners are planning renovations this year, with 1 in 4 of those homeowners planning major renovations.
When you renovate, you can increase the value of your home significantly, helping you to build equity and long-term wealth.
Inflation’s effect on the cost of supplies and labor is a major concern for many would-be renovators. But there are ways to keep the costs of a remodel relatively low, especially if you do your research and plan ahead. The first thing to do is make a budget that factors in a stash of cash to be used in case of delays or any other surprise costs that might come up.
Remember to protect your investment by updating your home insurance policy to ensure your coverage reflects the true value of your home after you have put all this work into it. It could also be worth your time to shop around for a better rate on your policy while you’re at it.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.