Over time, your home will appreciate in value. Home equity starts with a healthy down payment and fixing your mortgage payment, and is built by way of general appreciation and the repayment of mortgage debt. This is a simple concept, but it takes a long-term perspective in order to see its value.

Even if you bought at the top of the market prior to the housing crash, in the long run, the value of your property has a good chance of recovering. This is a difficult concept to grasp, especially in markets where housing values have crashed 30 percent or more. Keep in mind the declines are driven by extreme economic circumstances that will not remain the place forever; they do not invalidate the concept of long-term appreciation.

Home appreciation will return, as will the credit markets, and along with that, the ability to borrow against your home equity. If you work hard to pay down your mortgage debt, you will become naturally resistant to these forces, since giving in will undo what you worked so hard to achieve.

When you sell your home, the federal tax law currently allows a married couple up to $500,000 to be taken tax-free ($250,000 for individuals). This enhances the appreciation component, especially in retirement. A married couple can downsize and sock away half of million dollars to help fund their retirement years.

While appreciation is nice, don’t count on it as your only source of retirement – you have to live somewhere. The housing crisis has changed this, but prior to the crash, too many home owners decided to forgo saving for retirement because their home equity gave them the illusion of wealth. Stick with this simple concept: your home is not a vehicle to fund retirement. If you do this, you’ll be motivated to save and any appreciation in value will be icing on the cake.

If you understand home ownership in the context of hedging inflation and providing appreciation, the cost will be minimized and your chances of producing wealth will be maximized. You will enjoy the benefits of a fixed monthly payment, adding to it as your income increases over time, and you’ll own your home to own it. It will never own you.

INSIDER TIP: Don’t Get Caught Up over Tax Benefits

The mortgage-interest tax deduction should not be listed as a primary reason for home ownership. Tax benefits are inherent to the equation of your net monthly housing cost as a home owner, but they don’t merit buying home on their own accord. From a financial standpoint, market conditions, long-term appreciation potential, and the cost of all things associated with home ownership (including tax benefits) are to be taken together in the buy-versus-rent decision. The tax benefits associated with your mortgage are the least of these because they wane over time as you pay down your debt (since your interest charges will decline). This is a good thing, since you want to pay your debt – all tax benefits aside!

People seem to get all caught up with the tax deductions a mortgage offers. Some people want to get a larger mortgage because they need the tax deduction. That didn’t make any sense! If you tax rate is 30 percent, ten you want to spend one dollar to save thirty cents? Sounds like you’ll be spending an extra seventy cents. You get the point!
 

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