The Benefits of Home Ownership
Home ownership is a goal that a great many people have, and it’s one that’s reached by a lot of people as well. While owning your own home conveys a number of non financial benefits, like having control over your own residence, there are many financial benefits involved as well.
Real estate tends to appreciate over time, not unlike the stock market does, and in fact real estate tends to be a much more stable environment for investment than the stock market is. Stocks rise and fall regularly in cycles, and are therefore quite volatile, and while the value of real estate does have its ups and downs as well, it’s mostly in a steady up market.
Therefore, we could say that real estate is more reliable and less risky than investing in the market, and this makes it a good fit with borrowing money to invest in it. This is what people do when they get a mortgage, they borrow to buy an investment which they are not only looking to benefit from by living there, they also are looking to accumulate wealth with the investment.
When one borrows money to buy a home, one gets to keep both the wealth and the profit from the transaction, instead of both of these benefits flowing to someone else if one is paying rent. People generally are faced with the decision of either renting or borrowing, and borrowing makes a lot more sense economically provided one is able to get and maintain a mortgage to buy their residence.
Over time, as the mortgage is paid down, this creates equity in the property, in addition to the wealth that is built as the property increases in value over time. If one rents, this happens, but for the benefit of someone else, the owner of the property that is rented.
Since you are making a housing payment anyway, if it can go toward paying your own mortgage down and have the principal amount paid over time add to your net worth, that’s certainly better than adding to someone else’s net worth, if you can manage it.
The Need For Mortgages
There are many things that you can save up for, even larger purchases like a car, and one can for instance drive an old car for a few years that doesn’t require a loan payment and save up what would have been spent on the loan and use it to purchase a better one once they have saved up enough.
Many people do not do this, because they tend to want the better vehicle now not then, and even if you buy an older car, there’s going to be costs involved with maintenance, but some people do manage to drive better cars without borrowing by being patient this way.
You can’t really do that with buying a home generally though. It takes people 25 or 30 years to pay off a mortgage typically, and this involves dedicating their housing payments to this purpose over this long. If you don’t own though, you still have to pay for housing costs, you still have to pay rent, and you can’t set aside this rent money, you have to pay it out.
So few people would ever be able to own their own home if they just saved for it, and even if you could do this, you’d be building wealth for the landlord you would pay rent to all those years when you could have been building it up for yourself.
So getting a mortgage to buy a home is mandatory in the overwhelming majority of situations, but it’s actually a great deal for people financially, as this allows them to own the property and benefit from the investment.
Depending on how much cash flow you have, borrowers will take out mortgages for up to 30 years, which is the amortization of the loan, how long they have to pay it off. If needed, this can be extended later by refinancing and extending the amortization, to whatever length of amortization you desire.
Types of Mortgages
Borrowers can sometimes be intimidated by whether or not one type of mortgage may be better than another. One needs to choose first of all between a fixed and variable rate mortgage, with a fixed mortgage locking in a certain rate over a certain period, the term, and a variable rate being subject to change as interest rates move.
Variable rates will get you a lower interest rate and lower payments, at least initially, but they involve more risk, as the payments can go up and one must ensure that they can handle the higher payments should they arise.
With a fixed rate mortgage, the lender assumes the risk here, and for that, they charge a premium. The rates with a variable mortgage can go both ways, they can go down and benefit the borrower, or they can go up, and the risk of interest rates increasing is what concerns both lenders and borrowers, and if the rate goes up too much, the lender may lose money on the mortgage.
So they set the rate higher on fixed deals, called the spread, and the longer the term, the higher the spread will be, since longer fixed terms involve more risk to the lender.
In some markets, like the highly competitive U.S. market, you can get a fixed rate over the entire amortization of the mortgage, up to 30 years, where in some other countries, the maximum term may be less. Lenders aren’t fussy about longer terms generally, so that should tell you something, this can be of benefit to borrowers as long as the spread isn’t too large.
So that’s what borrowers need to be looking at first, how much more will a fixed rate cost when the deal is agreed upon. The other consideration is what the interest rate environment is expected to be like over the term looked at. Nowadays, the spreads tend to be small as interest rates have been very stable lately, and may be expected to continue to be for some time.
Balancing Mortgage Payments With Other Debt
It is important to look at the big picture when managing your debt, and also realize that mortgages are unique in that they are a loan that creates wealth, and you want to make sure you are taking advantage of this created wealth to help manage your finances as time passes.
All debt matters, although the higher the interest rate is with a given debt, the more of a priority it needs to be. Oddly enough, a lot of people can become obsessed with paying off their mortgage, to the extent that other debts of a higher to much higher rate become neglected.
The first mistake that people can make is to get too aggressive with their mortgage payment, where money gets put on it that would be better served making extra payments on higher interest debt, or even setting it aside to prevent the need to borrow at a higher rate.
The original terms of the mortgage dictate what payments you will have to make to not be in default, which is something you certainly don’t want to do, so this means that you don’t want to overextend yourself with this.
This can mean buying a home of lesser value with more manageable payments, or it could mean resisting the temptation to set the amortization of the mortgage too short. It can also mean making prepayments on the mortgage too aggressively as well. It’s certainly good to pay off your mortgage faster if you have the means and it makes sense to do so, but the idea that guides you needs to be to pay the least amount of interest period.
From time to time, it often becomes wise to use the equity that you have built up in your home to reduce the rate on other debts, and these opportunities are fairly common. Some people resist this because they want to pay off their home faster and they see this strategy as somehow delaying this.
However, once again, the goal needs to be to pay off your debts period, not just pay off the mortgage, and by lowering your interest payments, this will get you out of debt faster, all other things being equal.. There are costs involved in refinancing mortgages, but very often, the benefits will outweigh the costs, and sometimes by a very significant amount.
So as time goes on, you’re building wealth here with this, and you are able to use this wealth to help manage your affairs. This may also involve getting a home equity line of credit, with rates friendlier than other borrowing options, and pay down existing debts with this, as well as use it for other things you may wish to borrow for.
Provided one has sufficient credit, and the threshold with mortgages tends to be lower since mortgages are secured, and one has a sufficient down payment, which can sometimes be borrowed, and one has enough income to support the mortgage payments, getting a mortgage to buy a home can be a fabulous idea which will benefit you for many years to come, perhaps over your entire lifetime.