As you grow older, the issue of wealth building comes front and center.
Wealth building simply refers to increasing the net value of your total
assets. Wealth building over time is one of the advantages of home
ownership.
Building Equity
Owning a home can help you build wealth in two ways. First, you build
equity by paying down your mortgage. A certain percentage of each
mortgage payment goes towards a reduction in the total amount owed.
Typically, payments in the first few years of the mortgage are
primarily applied to interest on the loans. As time passes, however,
more and more of each payment is applied to the outstanding loan
amount. Before you know it, the $300,000 loan is down to $50,000 and
you’ve gained $250,000 in wealth.
Appreciation is the second wealth building advantage to home ownership.
Each year, the value of your home will increase or decrease slightly
based on market prices. Over time, real estate has always appreciated
in value. In the current market, homes in some parts of the country are
appreciating at rates as high as fifteen to twenty percent!
Appreciation is a very popular subject with homeowners.
Wealth Building Example
Let’s look at a simple demonstration of how advantageous home ownership
can be. Assume you buy a home in 2005 for $400,000 and, for the purpose
of simply mathematics, pay no down. Over the next 10 years, your
mortgage payments reduce the outstanding mortgage by $100,000 and the
home increases in value to $600,000. The value of your home as a net
asset has grown to $300,000 [$600,000 minus $300,000]! If you had
rented during this period, you would have missed out on $300,000 in
wealth. This simple example should show you the advantage of home
ownership.
Historically, home ownership is one the best ways for families to build
wealth. If you don’t currently own a home, you should start looking for
one.
