Financial Literacy for Everyone

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One of the biggest advantages of home ownership is the equity you build in your home. The faster you pay your mortgage and build this equity, the better your financial shape. Equity can be a powerful tool to manage your finances.

Home Equity

Paying Off Your Mortgage
Typically, during the first few years you're making payments on your mortgage, most of your payment goes toward interest and not very much goes toward paying down the principal. The more you owe on the mortgage, the more interest you'll pay. So if you increase the amount you pay, more of the principal will be paid and less interest will be charged. By pay more of your principal each month, you decrease the overall interest in the future for your remaining principal. You could retire your mortgage several years ahead of schedule if you just make one extra mortgage payment per year.

Home Equity Credit Lines
A home equity line of credit is a form of revolving credit in which your home serves as collateral. With a home equity line, you will be approved for a specific amount of credit that represents the maximum amount you can borrow. Payments have a variable interest rate and a minimum payment due each month based on the amount of the credit line you have used. Once approved for the home equity plan, you will be able to borrow up to your credit limit at any time. You can draw on your line of credit by writing checks against it and may be charged for a property appraisal, application fee and possibly other costs.

When you sell your home, you will be required to pay off your home equity line in full. If you are likely to sell your house in the near future, consider whether it makes sense to pay the upfront costs of setting up an equity credit line. Also keep in mind that leasing your home may be prohibited under the terms of your home equity agreement.

Home Equity Loans
Similar to a home equity line of credit, a home equity loan is backed by your home as collateral. Because it is considered more secure by lenders than unsecured debt, such as credit cards, home equity loans offers more attractive interest rates than unsecured loans.

A home equity loan is best used for a specific expense, such as paying for college, which you may be able to pay off faster than your primary mortgage. If you're carrying a great amount of high-interest and unsecured debt, transferring it to a home equity loan can help you pay it off sooner, as well as provide tax advantages. The interest on up to $100,000 of a home equity credit line or home equity loan is tax deductible.

Refinancing
If interest rates have dropped since you took out your mortgage, you may want to consider refinancing your home — that is, getting a new mortgage with a better interest rate to replace the old one. As a general rule, if you can cut your rate by 2 percent or more, it is worth investigating. Depending on how much the new bank charges in closing costs and how long you plan to stay in your home, you could end up saving a significant amount of money this way. Refinancing may slash $100 to $300 or more off your monthly payment. Interest on the entire amount borrowed is tax deductible, unless you increase the amount of the loan by more than $100,000. Consult your tax adviser to discuss the particulars of your situation.

It is not always necessary to refinance with the same mortgage broker that you originally used. It's wise to try your original broker first, as you may be offered an attractive package so the broker can keep your business, but shop around and compare rates as you did the first time around.

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