Building Home Equity? Time is on Your Side

 

Home Equity is the amount of the house you actually own. It’s the difference between your loan balance and your home’s current value. If you sold your house and paid off the loan, your equity is the amount you’d have left over.

Amortization is the pay down of a debt over time with regular payments. For example, you make mortgage payments every month, right?  Some of that payment covers the interest you owe, and some of the payment pays down your principal. In the beginning of the loan, most of the payment goes towards interest.  But over time, the percentage of interest shrinks, and your principal payment gets larger.  This is called “amortizing” your loan.

First time home buyers usually start out with little equity, or whatever down payment they were able to make. Whatever equity you started out with, it is best to build on it quickly.  The days of massive increases in real estate values are over, and nowadays they are rising at a more realistic pace.  Therefore we ought to concentrate on building equity the old fashioned way – earn it and pay for it.

Over the life of your home loan, equity increases as the property values appreciate and by methodically paying down the loan balance. A healthy goal would be to pay down that home loan as much as humanly possible before retirement.  Building equity in your home this way will increase your net worth.

Here are a few of ways to maximize your home equity, and pay down your mortgage faster.

Switch to biweekly payments   Ask your bank if it will set up a biweekly payment plan. Some banks do it for free, and others charge. Be sure that extra payments are credited toward principal so you save on interest expense.  Be aware that some banks wait to apply extra payments until the end of the year.

Refinance to a shorter term loan. If you can manage the increased monthly payment, this will get the job done faster.  For example, a 30-year loan ($100,000 loan at 5 %), your principal and interest payments would be $537. On a 15-year payoff schedule, your principal and interest payments are $791. That’s $254 more a month.  Consider this if you can.

To get the effect of a shorter mortgage without the risk, take out a 30-year loan, but make payments as if you had a 15, or even a 10year loan!  There are loan calculators on line to help you accomplish this trick. Even if you can’t do it every month, those occasional higher payments will get you paid down sooner.

Do a Round Up!  Say you have a mortgage payment of $879 per month.  In your mind, you might be thinking your payment is $900.  So why not pay $900?  An extra 21 bucks a month may knock off a few payments at the end of the loan.  If you can swing it, why not?

If you have any questions about how to make this happen in your mortgage, call me today.  I have wonderful qualified loan officers on my team that can help you plan out and realize your home equity building goals.  Call or email me today, and we can discuss how to get you on the path of building equity!