Do you think about what you are going to pass down to the next generation, other than the “small fortune” you’re planning to get once you finally cash-in on that Beanie Baby collection? Often children inherit their parents’ homes, along with the home equity, which is a form of generational wealth.
While renting gives you more freedom, it doesn’t give you the opportunity to build your personal wealth the way buying a home would. So, if you’re debating over whether to keep renting or if it’s finally time to buy a home, give this blog a read. We’ll cover the basics of renting vs. buying, as well as what home equity is and how that plays into building generational wealth.
IS BUYING A HOME BETTER THAN RENTING?
The question of whether or not renting is better than buying is probably as old as “Which came first, the chicken or the egg?” While we may never know if the egg came before the chicken, we do have insights on the renting vs. buying a house debate. Using a free rent vs. buy calculator can even break down a cost comparison of monthly rent vs monthly mortgage.
With the national median cost of rent at $1,995, many people are wondering, “If I can afford consistently rising rent rates maybe I could afford a mortgage instead?” and they may not be too far off base with that line of thinking. When you own a home, you may be able to get more square footage for your money and you have more freedom in the space than you would with renting.
WHAT IS GENERATIONAL WEALTH?
Generational wealth is defined by the assets passed on by one generation of a family to the next. These assets can include cash, investment funds, businesses and real estate. Many homebuyers rely on getting a mortgage to help build their equity. Once you pay off that mortgage and own 100% of the home’s equity, you can pass this on in the form of generational wealth.
However, due to the racial wealth gap, not everyone has built generational wealth for their families at the same rate. A report from the Federal Reserve (FED) found that the median wealth of black families was 15% of the wealth of white families. Having access to equitable mortgage options and first-time homebuyer assistance programs* can help level the proverbial playing field.
HOME EQUITY AND GENERATIONAL WEALTH
Building home equity and establishing generational wealth go hand-in-hand with one another. Home equity is any part of the home value that you own outright which will continue to grow as you pay down your mortgage. For instance, if your home is valued at $350,000 and you still have $150,000 to pay off on your mortgage, your home equity would be $200,000.
When an heir receives a home, they may use this as a building block for generational wealth especially if the property has appreciated. Should the heir decide to sell the property, they could use the proceeds of the sale any way they wish. Some common uses include paying for the next generation’s education or reinvesting into other forms of real estate.
Plus, along with owning actual real estate comes a sense of security that renting doesn’t offer. By becoming the owner of the property, your heirs will have an asset to pass down to their heirs. It will also provide your heirs with something to borrow against should the need arise.
So, while renting may give you the freedom to move around easier than owning a home would, you don’t have the same opportunity to plant roots and build sustainable wealth for your future. As you decide whether to rent or buy, it always helps to have an expert by your side.
Contact your local PrimeLending mortgage expert to get started on your journey to homeownership.
*Certain restrictions apply. Not available in all areas. Please contact your PrimeLending loan officer for more details.
