I hear on TV and the radio a lot discussions about the concept of “equity” and how much equity people have in their homes. There’s the equity that one gets from paying down the mortgage on their house (or from paying cash for part or all of their home purchase) and then there’s the equity from the value of the house rising, independently of what you paid for it. I used to think about that second kind of equity as some kind of return on my investment, but not any more.
For me, that second kind of equity doesn’t exactly matter, and here’s why. I live in an inexpensive part of the country. If the value of my house shoots way up, I know that the value of more expensive places have shot up even more. I don’t live in a place where it’s really possible to downsize very much – yes, I could live in a smaller house once my kids grow up, but the difference in price between my house and a much smaller house, in my particular market, is not all that much. Not enough to retire on or anything like that, in fact, not even enough to support us for a year. And there aren’t a lot of other places in the country I could move to that have even lower home prices than we do.
I’m fast approaching my mid-thirties, and there is no way I’d want to still be paying a mortgage when I retire. The equity in my house that I contribute to – by paying down my mortgage – is important to me, because once the house is paid off, I can use the proceeds from selling the house someday to buy something else reasonable and not have a mortgage, if we choose to move. But I don’t expect to make a huge profit from that and walk away with college for my kids or our retirement all taken care of. The amount my house increases in value just keeps me able to buy something else someday if we did decide to move, since all the other similar houses go up in value as well right along with mine.
Maybe I’m a pessimist, but I prefer to see it as realism. As long as we’re just staying put in this house, it doesn’t really matter how much fluctuation happens in its value. And at some point in the future, if we decide to move, the increase in value just needs to keep up with everyone else’s so we can break even. It’s not an investment, its just our home. We have to live somewhere, after all. I do look forward to when we earn a good chunk of equity from our own payments, though.