How Does Owning a Home Decrease Debt?
Home ownership is associated with the American dream. Beyond white picket fences, all homes represent financial commitments. Manage your finances properly to harness the economic advantages of your home.
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Benefits
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Home ownership and mortgages demand regular payments that automatically build equity and reduce debt over the long term. Appreciating property values accelerate the wealth creation process.
Identification
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Most consumers use mortgage financing to purchase homes. Debt is reduced as the mortgage loan is paid off over time.
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Features
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Your home equity increases while the mortgage is paid off and home values increase. For example, you may take out a $250,000 mortgage to buy a $250,000 home. After one year, the home is worth $275,000, and your payments have cut mortgage principal to $225,000. Home equity then adds $50,000 to your overall net worth. You may borrow against this home equity to refinance other debt into lower interest rates.
Considerations
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Interest-only mortgages permit you to make payments that only cover the interest charges upon the loan for a set period. Interest-only loans, alongside cash purchases require that home values increase for you to build equity.
Risks
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Home prices may fall during recession, resulting in negative equity. Negative equity is when you owe more on the home than it is actually worth.
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References
Resources
- Photo Credit house image by Byron Moore from Fotolia.com
