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 will 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 will 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 ahead of schedule if you make extra repayments. However, some banks may impose fees on their mortgage customers if additional repayments are made. So you should check with your lender.

Home Equity Loans
A home equity loan is a form of credit in which your home serves as collateral. Because they are considered more secure by lenders than unsecured debt such as credit cards, most home equity loans offer more favorable 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 are carrying a great amount of high-interest, unsecured debt, transferring it to a home equity loan may help you pay it off sooner and save interest costs.

Just remember that you have used your home as collateral. If you can't keep up with the payments, you may lose your home.

Refinancing
If interest rates have dropped since you took out your mortgage, you may want to consider refinancing your home – that is, getting a new mortgage with a better interest rate to replace the old one. Depending on the transaction and administration costs for refinancing the mortgage and how long you plan to stay in your home, you could end up saving a significant amount of money this way.

You do not have to refinance with the same mortgage provider that you originally used. It is wise to try them first, as they may offer you an attractive package in order to keep your business, but shop around and compare rates as you did the first time around.

• Costs versus Benefits
  To make sure you are going to save money by refinancing, take all the costs into consideration.
• Costs
  You may have to pay bank administration charges and solicitor fees when you refinance. Depending on how high they are, they may overshadow the savings you will get from your new interest rate and it may not be worth it to refinance.
• Pre-payment Penalties
  Your current mortgage may have a significant penalty for pre-payment that could overshadow the savings that result from refinancing. Check your mortgage papers. If a pre-payment penalty exists, it will be in your agreement.