Wealth and Debt: Home Loans
At some point in the future you will probably decide to purchase your own home. Homes are expensive and you typiclly take out a mortgage to finance your purchase. On a positive note, making payments on your home each month increases the value of your assets (the property you own) by building equity. Equity is the part of your home that you actually own. The more payments you make on your home, the more you own of your home. By the time your mortgage is paid in full, you will own your home outright. By contrast, you do not build equity when you rent.
Home purchases are typically believed to increase one's wealth because their value normally increases in value over time. If your home value increases, you have made money on your investment; the difference between the original cost of the house and what the house is worth at the end of the life of the loan is your money earned. This situation describes an appreciating asset, or an investment (your home) whose value increases over time. Mortgage debt only increases personal wealth if the property holds or increases in value. Some people are currently learning a very tough lesson about paying too much for property.
Video: Central California Housing Crash
The United States went through a severe housing crash in the mid to late 2000s. Review the video below to see how Central California was affected by the housing crash.
Did you notice a pattern in debt that increases your wealth? It includes investments in your future. Going into temporary debt for the correct reasons, ensuring that you make timely and complete payments, will help your overall financial health.
