Buying
a Home
Step 8: Home Sweet Home Equity
One of the biggest advantages of home ownership
is the equity you build in your home. The faster
you pay your mortgage and build this equity,
the better financial shape you'll be in. Equity
can be a powerful tool to manage your finances.
Paying off your mortgage
During the first few years
you make payments on your
mortgage, most of your payment goes toward
interest and not very
much goes toward paying down
the principal. The more you owe on the mortgage,
the more
interest you'll pay. So if
you increase the amount you pay, more of the
principal will
be paid and less interest
will be charged. You could retire your mortgage
several years
ahead of schedule if you
just make one extra mortgage payment per year.
Home equity credit lines
A home equity line of credit
is a form of revolving credit
in which your home serves
as collateral. With a home equity line,
you will be approved for
a specific amount of credit
that represents the maximum amount you
can borrow. You pay a variable
interest rate and have
a minimum payment due each month based
on the amount of the credit
line you have used.
Once
approved for the home equity
plan, you will be
able to borrow up to your
credit limit at any time.
You can draw on your line of
credit by writing checks against it. You
may
be charged for a
property appraisal,
application fee and possibly
other costs.
When you sell
your home, you will be required
to pay off your home equity
line in full. If you are
likely to sell your
house in the near future,
consider whether it makes
sense to pay the up-front
costs of setting up an equity
credit line. Also keep in mind
that leasing your home may
be prohibited under the
terms of your home equity
agreement.
Home equity
loans
Similar to a home equity
line of credit, a home
equity loan is backed
by your home as collateral.
Since such loans are considered
more secure by lenders
than unsecured debt
such as credit cards, home
equity loans offer
more attractive interest
rates than unsecured loans.
A home equity
loan
is best utilized
for a specific expense, such
as paying college expenses,
which you will be able to
pay off over a shorter
time period than
your primary mortgage. If you're
carrying a great
amount of high-interest, unsecured
debt, transferring
it to a home equity
loan can help you pay
it off
sooner, as well as
provide tax advantages.
The interest on up to $100,000
of a home equity
credit line or home equity
loans is tax-deductible.
Just remember that you've used your
home as collateral.
If you can't keep up
with the payments,
you may lose your
home.
The costs
of a home equity loan are
similar to a home equity line of credit. |
