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
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).
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