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Real Estate : Home Buyers Last Updated: May 14th, 2012 - 22:24:01

A Home Is to Be Lived In, Not Lived From

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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.


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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