Using a Home Loan Refinancing to Build Equity
The subject of home loan refinancing has been in the news quite a bit lately, with some homeowners finding it’s the only way to keep their mortgage affordable. Those who have adjustable rate mortgages are often caught off guard when those loans reset to a higher rate which increases their monthly payments by up to half over again. Only through home loan refinancing have they been able to continue with their mortgage payments at all.
However you can also go through a home loan refinancing even if you can afford your current mortgage payment; as a matter of fact, this is a great way to build equity. How so?
Most consumers fall into the habit of paying only the minimum monthly payment due on any bill or debt they have. If their credit card bill has a minimum payment of $75, that’s what they send in regardless of how much they owe on that card. Think about this fact when considering a home loan refinancing to build equity in your home.
The only way that you can build equity is to have less owed on your home mortgage than what your home is worth. The difference between these two numbers is the equity in your home. So how does the practice of paying only a minimum amount every month come into play when using a home loan refinancing to build equity?
One problem with trying to build equity is that when pay the minimum amount that is due, most of that goes to the interest payment and very little of it goes toward your principal. The more you pay down your principal, however, the more equity you’ll build. When you go through a home loan refinancing you typically lower your interest rate on that principal loan balance.
If you keep paying only the minimum due, you’re still not going to pay down much of the principal since your monthly payment also gets lowered.
So here’s how to build equity using a home loan refinancing. When you go through the refinance and have a lower rate and a lower monthly amount due, just continue to pay your previous amount. For example, if your original mortgage had a minimum payment amount of $1,200 and your home loan refinancing lowers that minimum to $1,000, just continue to pay the previous amount of $1,200.
When you do this you’re paying more toward the principal amount every month than you normally would since you’re overpaying your home loan. When you pay $1,000 as a payment, chances are that more than half that goes toward the interest amount due. So if you continue to pay what you did previous to your home loan refinancing you’re putting that much more toward your principal.
And of course the more of your principal that you pay down, the more equity you build in your home! Unfortunately not many people do this after a home loan refinancing, but it is a very good way to make your money work for you.
