Your reasons for owning a home and how you use it in relation to your
finances have a great impact on how you manage your mortgage debt. If you
believe, for example, you’ll consume at higher levels, using your mortgage debt
to finance big-ticket items. This might create a stable of possessions, but
hopefully you can see that it won’t create wealth and the freedom to enjoy it.
Certainly, the economic meltdown has made this point painfully clear.
It is imperative that you strip away the emotional component of owning a home if
you are going to be successful with your finances. The emotional component
drives bad financial decisions such as the following:
• Squeezing yourself into too much home, rather than taking on what’s adequate
(squeezing into a smaller place is a better decision)
• Making room additions you can’t afford
• Putting in a pool and going into debt to do it
• Using your equity to buy big-ticket items in order to satisfy your quest for
possessions
You must remain objective with your finances. Besides the obvious good emotional
reasons – a place to call your own where you can raise your family – there are
two objective reasons to own a home: owning a home provides you with a hedge
against inflation, and it provides you with long-term, part5ially tax-free asset
appreciation.
Inflation
For the vast majority of us, our mortgage payment is our largest monthly cash
outlay. By fixing the monthly payment, a home owner enjoys housing on an
inflation-proof basis. Most everything else associated with home ownership will
increase over time – utilities, insurance, and so forth – yet the monthly
payment can be fixed. As time wears on, the payment becomes more and more
affordable, at some point becoming much less than rent for a comparable
property.
Renters don’t have the protection against inflation a home owner enjoys
(assuming the home owner manages his mortgage debt wisely). One of the primary
financial motivations for buying home is that it protects you from the cost of
escalating rents.
In order to understand more about how you are protected against inflation, let’s
look a mistake. One of the primary ways trouble begins is when a home owner uses
an adjustable-rate mortgage (ARM) in order to save money when rates are low.
Interest rates are usually lower when the economy is slow or struggling. As the
economy recovers and inflation becomes a risk, the Federal Reserve will increase
interest rates, which will generally increase mortgage rates and the payment on
ARM. Thus, as inflation cycles upward, so does your mortgage payment. The ARM
works against you during periods of inflation – this is one of the reasons to
stick with fixed-rate financing.
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