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.
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