Wealth Building - An Advantage of Home Ownership
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.