Business Booster, Helpful Tips

Race for Home Equity – Choosing the Right Loan Program

October 1, 2010 by · Leave a Comment 

Race for Home Equity by jkbarath | Flickr.comThose of you who take home ownership seriously often look for home loan options to build home equity at a faster pace. An aggressive approach is to select a 15-year home loan program over a 30-year mortgage. A 15-year home 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 home payments.

Provided as the homeowner you can afford the financial commitment of a 15-year loan, you 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, you need to be aware that unless you are extremely financially secure, even a minor setback can have a tragic impact on your 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 home loan, or to invest the extra dollars into another type of asset accumulation account. Here the compelling question is, is it better to take the risk of a non-guaranteed investment, or bank on the guaranteed savings on mortgage interest.

Making prepayments on a 30-year loan is often deemed to be the safer route, and you as the borrower can make the extra payment when you want to, rather than through obligation.

If you made less than a 20% down payment on your home purchase, principal prepayment offers you the ability to have your loan reviewed by the lender for the purpose of removing any private mortgage insurance payment (PMI) earlier than expected. First, as the borrower you need to discuss prepayment procedures with your lender, and take into consideration whether there is any prepayment penalty associated with your  financing before initiating prepayments. You should also note that principal prepayment reduces mortgage interest, which is tax deductible. Depending on what your tax bracket is, this may or may not be beneficial to you.

If the extra money is invested in some other vehicle, the earnings will be reduced by taxes (unless the money goes into a tax-exempt fund). Homeowners should always 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 home equity at a faster rate, but you should be wary of companies that ask for a setup fee and monthly charges. The most important thing to remember is that each home buyer and homeowner has different goals. These are just a few options for building home equity.

Contact me for even more information on programs to promote faster home equity building and cash flow.

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James K Barath, CMPS®

James K Barath is a Certified Mortgage Planning Specialist®, Certified FICO® Professional, Certified Military Housing Specialist® and your FHA Home Loan Expert. He is also a graduate of Purdue University, The CMPS Institute, Dale Carnegie Human Relations Course & Napoleon Hill Foundation's PMA Science of Success Class. It's your home and your future. It's his profession and his passion. He is ready to work for your best interest. Contact James for your FREE Home Loan Approval !  His Motto: I Facilitate the American Dream Through Responsible Mortgage Lending and Financial Literacy!

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