A top-ranked advisor asserts that purchasing a home is a way to boost your net worth in the long run.

• In the second quarter of 2024, a recent study shows that U.S. homeowners with mortgages have a net homeowner equity of over $17.6 trillion.
• But such homeowners did not acquire that equity overnight.
• Within five to 10 years, homeowners can witness an increase in their equity and net worth.

Purchasing a house is typically the largest financial commitment for many individuals.

Financial experts suggest that building wealth and increasing net worth is a common path.

In Q2 2024, U.S. homeowners with mortgages had a net homeowner equity of over $17.6 trillion, according to CoreLogic. Home equity grew by $1.3 trillion in Q2 2024, an 8.0% increase from the previous year.

Your home's equity is calculated by subtracting the amount you owe on your mortgage from the value of your home.

How new homeowners create equity

Homeowners, however, did not acquire that equity overnight.

Steven LaRosa, director and senior portfolio manager at Edgemoor Investment Advisors in Bethesda, Maryland, stated that at the start of homeownership, the loan is typically large, and there is no equity in the house. Edgemoor Investment Advisors ranks No. 14 on the 2024 CNBC Financial Advisor 100 list.

Within five to 10 years, homeowners can witness an increase in their equity and net worth due to various factors such as down payment, loan term, credit score, and property value appreciation.

Immediately after making a down payment, you can have equity in a house. For instance, if you purchase a $250,000 home and pay $17,500 down, your immediate home equity is $17,500, according to Freddie Mac.

As you make mortgage payments, a portion of each payment goes towards reducing the outstanding principal and the interest you owe.

According to LendingTree, your monthly payment for a $400,000, 30-year fixed-rate mortgage with a 5% interest rate would be $2,147.29. Of this, approximately $480.62 would go toward the principal, while interest would take up $1,666.67.

Over the life of the loan, the funds allocated to the principal will accumulate.

Experts suggest that homeownership is a valuable tool for building wealth because it enables you to accumulate equity through mortgage payments, which increases the value of your property over time. Unlike rent, which is a recurring expense, this essentially acts as a forced savings mechanism, contributing significantly to your wealth-building efforts.

Over the past 33 years, the median wealth gap between homeowners and renters has grown by 70% to $390,000, as reported by the Urban Institute.

As you pay off your mortgage and the value of your home rises, your net worth will increase in the future, LaRosa stated.

"According to LaRosa, while owning property can increase your net worth over time, it may negatively impact your net worth in the initial years, specifically during the first year or two after purchase."

Advisors suggest considering factors and the impact on net worth before making a major home purchase.

What happens in the first years of homeownership

Stephen Cohn, co-founder and co-president of Sage Financial Group in West Conshohocken, Pennsylvania, says that if you buy a home for $250,000 and put 20% down, or $50,000, you should know that the firm ranks No. 61 on the 2024 CNBC FA 100 list.

"The asset on your balance sheet is truly $50,000," he stated. "It's not $250,000."

According to certified financial planner Shaun Williams, private wealth advisor and partner at Paragon Capital Management in Denver, the cash you had for your down payment has become illiquid, making it harder to access than before. The firm ranks No. 38 on the FA 100.

The additional costs of closing and title insurance may decrease your net worth in the short term, according to CFP Jeffrey Hanson, a partner at Traphagen Financial Group in Oradell, New Jersey. The firm ranks No. 9 on the FA 100.

Cohn stated on CNBC that "you won't be building any equity through your monthly mortgage payments during the first five to seven years."

According to Hanson, it takes time to accumulate equity in a home through mortgage payments.