home equity

How to Build Home Equity Fast

For the best experience, you need to build equity in the home quickly. That means you need to be smart with your monthly mortgage payments to reduce the amount payable in interest.

About 30 percent of the homeowners in the USA are mortgage-free, having paid off their home loans to own 100 percent equity in their homes. Most of these people fall in the senior citizen category between 65 and 85 years of age. Naturally, these folks have had more time to pay off and service their home loans.

However, that doesn’t mean that you need to retire to pay off your home in full. If you’re keen to build home equity quickly, it’s crucial that you get the best mortgage rates in Guilford.

Understand the interest and principal loan ratio

interest rate

New home loans are front-end loaded. That means that the heft of initial monthly payments goes toward paying off the interest on the loan, not the loan itself. Say for instance that your monthly payment on the 30-year mortgage works out to $600. During the initial stages, about $500 of each payment might go toward the interest. The amount of principal repaid each month increases after you’ve paid back the bulk of the investment.

Frontloading enables banks to increase their return on investment. Unfortunately, paying off the bulk of the interest first comes with a drawback. It will take a while to reduce the amount of money you owe as principal, and this increases the amount you pay back as interest.

Attack the principal loan amount

If you find the frontloading approach uncomfortable, you don’t have to put up with it. You can request your banker to allow you to balance the amount that goes toward paying off the interest and the principal loan. Such a move, however, will increase the size of your monthly payment.

Alternatively, you can make a point of overpaying the loan each month if and whenever you have extra money. Any additional payment that you make over and above the agreed monthly payment goes toward reducing the loan amount. Such an approach is preferable as it gives you the freedom to play with your available income.

However, you need to be sure that your lenders won’t punish you for paying off your mortgage early. The extra payments eat into the bank’s profit margins as they lower the amount of money you owe. Be sure to check that your lender won’t impose a fine or a penalty for paying off your mortgage quickly.

In the end, remember that mortgage lenders structure a home loan to suit your financial situation. However, they will structure the repayments in a manner that lets them get paid first. If you’re keen to build equity quickly in the home, you need to counter the frontloading approach. Throwing every extra dollar toward the mortgage lets you lower the principal amount and pay off the debt quickly. If you need more information, feel free to look for other reliable sources online or offline.