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Build Your Equity Faster By Refinancing

Oct 22, 2007
There are a number of mortgages out there that give you low payments each month. Some of these mortgages, such as interest only, adjustable rate mortgages, and a few others, gave you the low payment up front - but it was at the expense of building up your equity. Here is how refinancing your mortgage can enable you to start building up your equity faster.

Equity is the amount of cash you have available after you have lived in your home for some time. It is the difference between the current value of your home and the amount you still need to pay on your mortgage. Mortgages that allow you to make low payments up front, though, usually will use your cash to pay the interest - and it does not reduce the principal much if at all. Your equity, however, can only be built up when you pay down the principal.

This could leave you with a couple of options if you want to build up your equity quicker. The first option would be to put down a large chunk of cash at one time. Most of it would be applied to your principal. Most people, however, do not have the opportunity to do this.

A second option would be to refinance your mortgage. If you watch the market and apply when the interest rates are down, you could save thousands of dollars. If, besides this, you shorten the repayment time by at least five years, you could save tens of thousands of dollars in interest. This results in more money going toward the principal each month.

A fixed rate mortgage would give you stable payments. You always know what they will be, and you can always confidently plan around it. You do not have to worry about what the economy is doing. Even better, though, is that a larger portion of your monthly payment goes toward your equity than most other types of mortgages. By getting a fixed rate mortgage, and reducing your time to pay off the mortgage, you can build up your equity even faster.

Since you are considering refinancing, you may also want to tap into some of that equity - perhaps for home renovations. Some renovations, such as siding, remodeling a kitchen or bathroom, or adding a room onto the house, can also put a lot more value into your home as soon as the project is finished. Obviously, this would also quickly raise the amount of equity you have, too. Be sure, though, that you check with your local Realtors or contractors in your area to find out which renovations actually add the most value - some renovations do not change the value much.

Be sure to shop around some for the best deal. Lenders vary quite a bit in their prices and fees, as well as in their interest rates. Building your equity fast means not letting too much of your hard-earned cash go unnecessarily into the lenders pockets. When you refinance, stay away from mortgages that have penalties for paying off your mortgage early.
About the Author
Joe Kenny writes for Rebuild.org, offering home refinance, or for UK residents homeowner loans.
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