First time home buyers, Loan Information, Loan Programs

The Race for Equity

Choosing the Right Loan Program

Those who take property ownership seriously often look for options to build equity at a faster pace. An aggressive approach is to select a 15-year loan program over a 30-year mortgage.

A 15-year loan works well for home buyers budgeting time and money, those who are possibly looking forward to a debt-free retirement, or those who plan to upgrade to a larger home within 15 years. But this requires a sincere commitment to making substantially larger monthly payments.

Provided the homeowner can afford the financial commitment of a 15-year loan, they will pay significantly less money in interest simply because the life of the loan is spread over a shorter period of time. This will also result in a larger tax deduction; but again, over a shorter period of time. However, they need to be aware that unless they are extremely financially secure, even a minor setback can have a tragic impact on their ability to make mortgage payments on time and in full. The bottom line is that it’s probably not a good idea to put all available cash into a mortgage payment and lose any hope of a financial cushion in the event of emergency.

A less vulnerable approach is to consider making principal prepayments on a 30-year loan, or to invest the extra dollars into another type of asset accumulation account.  Which we call a side account. Here the compelling question is, is it better to take the risk of a non-guaranteed investment (stock equity’s), or bank on the guaranteed savings on mortgage interest? The choice is a personal one, even when the numbers are crunched and point one way or the other.

Making prepayments on a 30-year loan is often deemed to be the safer route, and the borrower can make the extra payment when they want to, rather than through obligation of a shorter term mortgage. If the homeowner has made less than a 20% down payment, principal prepayment offers them the ability to possibly refinance to remove their PMI or contact their lender for the purpose of removing any private mortgage insurance payment (PMI) earlier than expected.

They should also note that principal prepayment reduces mortgage interest, which is tax deductible. Depending on what their tax bracket is, this may or may not be beneficial to them.  The monthly obligation of the mortgage payment does not decrease as the loan balance decreases. In fact, it could be said it is more important to make the mortgage payment as your equity in the property increases. Many people lose their homes with a 50% or more equity postion.

If the extra money is invested in some other vehicle, potentially earning interest and income for the owner.  The borrower should compare the mortgage rate to the rate of return on another type of investment, and decide if it makes more sense on an after-tax basis to invest the extra money somewhere else and have the ability to liquidate those assets if necessary.

Bi-weekly mortgage plans are another option for building equity at a faster rate, but consumers should be wary of companies that ask for a setup fee and monthly charges. This can be done easily yourself. Just divide your total monthly payment by 12 adn add that to your payment each month. Make sure to add the additional funds in the correct payment spot on the mortgaet coupon. The most important thing to note is that each client has different goals. These are just a few options for building equity.