12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Don't Undervalue Home Equity When Choosing a Mortgage
By Richard BarringtonNFNS Columnist
Mortgage companies
offer a wide array of options when it comes to new home loans. The natural
inclination is to lean toward those options which offer the lowest payments,
but home buyers should also be aware of the value of home equity as an asset. Often,
the new home loan formats which offer the lowest payments are the slowest to
build home equity.
Building Home Equity
There are essentially three ways of building home equity:
- Your down payment--this is immediate home equity
- By paying down your mortgage over time--this means the principal balance of your payments, not the monthly interest
- By increases
to the home's value
As recent events have proven, you can't always rely on this
last means of building home equity, and the first method is limited for most
people. However, the type of new home loan you chose can impact the middle
factor--the rate at which you pay down mortgage principal.
Longer term loans, such as a thirty-year vs. a fifteen-year mortgage,
offer the appeal of lower payments, but this means principal is paid down at a
lower rate. The initial payments are almost entirely interest. Interest-only
loans, which delay the repayment of principal, slow the building of home equity
still further.
A mortgage calculator or an amortization schedule from
potential lenders should help you see how quickly different loan options pay
down principal, and thus build home equity.
Keeping Your Options
Open
The value of building home equity is that it keeps your
options open for the future. If you can make the higher payments of a shorter
loan term, you'll pay less interest in the long run. If a need for cash arises,
you can always borrow against the home equity you have built up. Finally, if
you encounter a budget squeeze, you still have the option of lowering payments
by refinancing to a longer term.
About the Author:
Richard Barrington is
a freelance writer and novelist who previously spent over twenty years as an
investment industry executive.
About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.