I see it stated a lot in social justice circles that the path to building ‘generational wealth’ is via home ownership, but having lived with homeowners, that doesn’t seem to make sense. From the outside it looks like something you throw money into for decades, and then die and the bank takes over. How does just having a mortgage start to accumulate wealth???
In: Economics
The idea is you *pay off* the mortgage, and then the bank has no claim to your house any more, and also you basically live in your house for free now (aside from taxes, energy bills, etc.). So now you own a thing that’s probably worth several tons, and also you have very low living expenses. When you die, your kids inherit the house, and also in the years before you die you have more money to spend on them. That’s how homeownership produces generational wealth.
Compare that to someone who’s stuck renting their entire lives, who has to keep paying rent every month until they die, and then doesn’t own anything to pass on to their kids.
There was a time when housing prices were so reliably going up year after year that people started offering interest-only mortgages, where, at least for a time, you wouldn’t pay off your debt at all – you’d just pay the interest on that debt. The idea being that the value of the house would certainly go up, so when you sold the house again you wouldn’t be left with any remaining debt. Since these interest payments were often lower than what you’d pay in rent on a similar house, these mortgages gained some popularity. Of course, the downside is that you don’t build up any *equity*. That is, all the money you spend is “thrown away” as your debt never shrinks and your stake in the house never grows. And that’s assuming that your house won’t depreciate in value. If it does, then the selling price won’t cover your outstanding debt and so you will have yet more costs.
After the big housing crash in ’08, many governments started cracking down on these interest-only mortgages (or more generally mortgages with a low chance of being paid off in a reasonable amount of time), because with housing prices in decline, lots of houses ended up “under water”, i.e. the value of the house would be less than the outstanding debt on the mortgage on that house.
Anyway, the point is: a healthy mortgage is one where you pay off your debt in a reasonable amount of time (e.g. 30 years). For most people, this should mean that the mortgage is paid off in full (well) before they die, and so the bank will have no claim on the house.
> the **bank** takes over… How does just having a **mortgage**
In this case, you are not a homeowner since the bank owns your home (or technically has a lien on it). What people are referring to is almost certainly flat out owning your home – no payments to anyone.
Home ownership builds equity. Yes, there are costs associated with owning a home, rarely is a home *profitable*, but you don’t often own a home for profit. And even if you don’t generate a profit, you still own a tangible piece of property that retains *value*. You can always *sell it*. Even if you don’t pay your property taxes and the government forecloses on your home, they sell it off, take their cut + penalties, and you still get the rest, because that was your equity. If you wanted to take out a loan, you could offer your home as collateral to back the loan, so that if you defaulted, the lender would at least have some property worth some money they could sell and reclaim their losses, and in turn, you can negotiate a better rate than merely your credit history that only *suggests* you’re probably good for it.
And when you die, the property goes to your estate, and someone, like your children, inherit that ownership. They can sell it off.
What real estate people do is they play the game. They buy a house, wait for market value to increase, and then sell it. Rinse, repeat. 15% capital gains tax is way lower than my income tax bracket. Know who pays 15% income tax? People 1 dollar above the poverty line. You can buy and sell houses like this and accumulate a bit of wealth. You can rent that property in the meantime. Eventually, you can become a slum lord, owning a bunch of property and renting it all out. Eventually you’ll make more money than the cost of maintenance, which, as the property owner, is your burden. And all you have to do is assume some risk of renting – and that’s the catch. Renters might not pay you, then legally evicting them can take 6 months and is littered with gottchas that, if you screw up, you have to start the whole process over. Meanwhile, they’re squatting in your house you’re not getting paid for, and likely destroying it. They’ll walk away Scott free with nothing but a bad credit score and you’ll have to rehab a whole house which can cost tens of thousands.
So first off, a house has value. And that value grows over time. Any gains in value while you own the house are yours. Additionally, over the course of paying your mortgage (which is a combination of paying interest on the loan but also paying down the principal owed), you are paying down the balance owed to the bank. Each month, you own a little bit more of the house. After 30 years, you’ll own 100% of the house.
Say you buy a house for $250k. You put down $50k and take out a $200k mortgage. Over the next 30 years, you eventually pay that down to $0. And the house grew in value to $600k. You now own a $600k asset free and clear.
But you don’t even need to own the house for the whole 30 years… let’s say you bought a house for $250k 5 years ago. Same $50k down. Now you need to sell to relocate, and the house sells for $300k. You get those $50k in value gains, your $50k down payment, and you’ll have also paid down the mortgage some during that 5 years, so let’s say another $20k (most of mortgage goes to interest in early years)… that’s $120k in equity from $50k 5 years earlier.
You assertion that the bank takes over when you die is not true… a home may get sold upon the owners death, but their estate would get any profits. And most people (unless they die young) don’t tend to die with mortgages… most people buy a home in 30’s they pay off around retirement, then either keep it or downsize into a retirement home that costs less (freeing up some of that wealth to fund retirement).
Once you buy a house, your mortgage payments are pretty much fixed. Inflation means everything else, including wages goes up. So your effective monthly cost to live goes down.
For example, if you live in my city, if you bought a house 20 years ago, your mortgage payments would be about $1000 / month. Somebody who is currently renting an apartment is currently paying around $1800 / month. So it’s cheaper to own a house than rent (assuming you bought a long time ago). Yes, you still need to pay property tax, maintenance, etc, but it’s not $800 / month.
Plus in 5 years the mortgage will be paid off, (average mortgage length is 25 years), then that $1000/mo can going into savings, while the renter is still paying rent, which continues to go up.
Then, when you die, house will be worth $1,000,000. Average family has two kids, so each kid gets $500,000 that the renters kids don’t get.
The other option is reverse mortgage. When you get old, if you run out of money, the bank will slowly give you the value of your house in cash. Money doesn’t need to be paid back until you sell the house. This usually isn’t seen as a good idea, but when you are broke, it’s better than staving. At least it gives you an option the renter doesn’t have.
> then die and the bank takes over.
Then you didn’t own the house. The banks can only take your home if you have outstanding debt.
>How does just having a mortgage start to accumulate wealth???
It doesn’t, but paying into that loan does. Think of it like this. Every month you pay off your mortgage. The same way that you would have to to live anywhere else. The only alternative stable housing is either renting or finding a warm bridge. Then when you finish paying off that mortgage you get all that money back. In the form of a house. Lets say you get a 500k mortgage on a house and you “throw” money into every month, at the end of your life what do you leave your kids. You leave them a 500k dollar asset in the form of a house and the ability to not have to pay for housing outside of taxes. The price of that house is also going to rise with the market meaning its value is more resilient to inflation, and in many cases out out pace inflation. Its essentially a big investment fund that you can live in.
You pay off the mortgage before you die and the house goes to your kids. A mortgage is like a loan on a car, except the car is a house and it generally gains value instead of losing it. So you pay off the loan and then have an investment worth more than you paid that you can pass to your kids. The bank doesnt just get your shit when you die
If the bank takes home they never finished buying the house. So it was lost.
This is actually a good example because if they owned the home outright when they died it would stay in the family. It is a family home that doesn’t have constant rent/mortgage payments meaning that the family has more of their income to use on other things. It has worth, and when you own the home and land it can always be sold if you don’t need it/really need the money.
This is how it creates generational wealth.
A person’s “net worth” isn’t just measured by how many dollars they have in the bank, it’s measured by the value of the things they own (minus their debts). So if you own a house and it’s worth a million dollars (often the case even in regular-degular neighbourhoods here in Canada), that adds a million dollars to your net worth, and you can use that to do things like get good loans or establish a good credit rating: it increases your access to money in that way.
Also, just as another example: in the United States, public schools are often funded by property taxes in the area. So if you live in a neighbourhood where the houses & properties are worth a lot, your schools are better funded and that benefits you and your neighbours in all the ways that it does (including but not limited to job prospects). But if you live in an area with low property values, and/or places where most of the residents rent and just a few landlords own all the buildings, chances are your schools will suck and that will suck for you and your neighbours economically.
> and then die and the bank takes over.
That’s doing it wrong.
Real-estate has value because it’s “real”. Tangible. Unlike stocks that are more speculative and can just go *poof* and lose value overnight. You can do things with real estate that has lasting effect. Buying a home, and paying off your mortgage means you can pass that real thing to your heirs, and they have a platform upon which to build more wealth.
To put it even more ELI5’y: If you didn’t have to pay rent for 20 or 30 years because you inherited a place to live from your ancestors, wouldn’t you be better off?
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