Contact Us

text: (425) 502-5397

New: How Paying Off A Mortgage Builds Wealth

Posted on Mar 10, 2017

Few homeowners are likely to say that they enjoy making monthly mortgage payments. Fulfilling an essential financial duty might be satisfying in the same way that cleaning one’s room or emptying the dishwasher is satisfying, but few people are likely to relish the act of paying off a mortgage.

Which is strange, because most people enjoy receiving checks in the mail.

While paying for a mortgage and receiving a paycheck aren’t quite the same, the comparison highlights an important feature of owning a home and having a mortgage: both are far better at building wealth than renting. The classic argument for this idea is that, while rent checks pay for a physical space that the renter will never own, a mortgage payment finances a piece of property that will one day be owned completely by the occupant.

However, while this reasoning is perfectly sound, it also misses a key factor in a mortgage’s wealth-building power: mortgage payments contribute to building home equity, while rent payments do not.

Let’s say, for example, that you’ve just bought a $250,000 house using a 30-year FRM. The beauty of this loan is that, no matter what the market does in the three decades following your transaction, the rate at which the loan accrues interest stays the same. More importantly, so do your monthly payments.

At the beginning of your loan, most of your mortgage payments will be going toward paying off interest. However, a portion of your payments will also be going toward the principle, which means that you’re still paying off a percentage of the amount you borrowed for the house. Over time, more and more of your mortgage payment will go toward building equity, meaning that your mortgage payments will actually be contributing directly to an increase in wealth. And, in the end you’ll own your home, which, let’s not forget was worth $250,000 when you bought it, but has almost certainly appreciated in value since that time.

Now, this simple explanation undoubtedly glosses over the more complicated side of real estate loans. However, the bottom line is that paying off a mortgage contributes to building greater equity. In fact, the act of paying a mortgage essentially forces you to adopt a fixed savings plan, a vital part of building wealth.

Take a look at how this shakes out in a renting scenario: let’s say you pay a monthly rent of about $1,000 for the whole of 2017. You’ll make the same payment for your home every single month, but literally none of it will contribute toward building equity, as you’re not working toward owning the space you live in. Once your 12-month lease is up, the landlord can (and probably will) increase your monthly payments, meaning that you’ll be paying even more for your home each month. And guess what? None of that increased payment will be building wealth. It may as well just be vanishing into the ether. Or, if you need more convincing, consider the fact that monthly rent payments simply cost more than monthly mortgage payments in almost all states.

Overall, paying for a mortgage is not only cheaper than renting, but also helps you build wealth. To get this beneficial process started, contact Pickett Street or Cody Touchette with Caliber home Loans, MLO 83216.



Submit a Comment

Your email address will not be published. Required fields are marked *