When you buy a home, the money that goes toward a mortgage is building equity in the long run. With a good chance for real estate property to appreciate, the home value may be worth more than the money you put in over the years.
Paying off the principal of the loan while a home value may go up helps to create equity.
Equity example:
Bob buys a $100 real estate with a $20 dollar down payment and a $80 mortgage. A few years later, the real estate is worth $150 and Bob has paid a total of $25 and reduced the mortgage to $75. Bob’s new equity is $150 new value – $75 mortgage principal equals $75. Bob has gain a total of $50 more in equity ($75 new equity – $25 total paid).
Whereas the monthly rent is spent each month and is simply gone into the landlord’s bank account. As a renter, the rent is not going towards owning anything even if you have been paying for the past 10-20 years renting the same apartment. Instead of paying rent each month, the same money can be used as a financing instrument for your home.
It is not a guarantee that home values appreciate as time goes by. Some who bought near the 2000 financial crisis saw their homes lose value instead.
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