Buying a house is one of the biggest investments in your life. That is why the usual amortization period (the number of years you could pay off your mortgage) is up to 25 years. Meaning, if you pay your mortgage payments regularly without paying more than the minimum required monthly payment, your house is mortgage-free at the end the 25th year.
As time passes by, while you are paying your mortgage, the value of your house appreciates. Prior to our present worldwide financial crisis, it was estimated that the average annual increase of value of houses in Canada is 3%. It means if the value of your house is $300,000.00, after one year it would increase by $9,000.00 ($300,000.00 x 3%). When the value of your house increases, the equity of your house also increases.
Your house equity is the difference between the present value of your house and the present balance of your mortgage. If your house is worth $300,000.00 and the balance of your existing mortgage is $100,000.00, the equity of your house is $200,000.00 ($300,000.00 – $100,000.00).
If you do not have extra savings for emergencies or for your retirement, your equity becomes your nest egg. It is your money saved for emergencies or for retirement. Taking out your equity by increasing your mortgage, would wipe out your nest egg and could lead you into financial burden even after you retire when you only rely on your senior citizen’s pension.
It is unfortunate that there are senior citizens who keep their houses with big mortgage when their mortgage should have been paid in full or substantially reduced at their retirement. As a result, instead of living a good life, they are financially burdened and they don’t have peace of mind.
A common reason why their mortgages are not paid off or substantially reduced at their retirement is because they took out the equity of their houses for purposes other than emergencies, like: vacations, unnecessary house renovations, buying expensive cars and other unnecessary expenses to catch up with the standard of living of their friends and relatives.
The mortgage amortization of 25 years is good enough to reduce your mortgage to a minimum if not to pay it off in full at your retirement. However, if you squander your equity on expenses other than emergencies, you would end up retiring with a baggage of debts. That is why it is prudent to reserve your house equity for emergencies only so you could enjoy your retirement life – free from a burden of debts.