What is Home Equity and Why is it Important?

June 28, 2017

For the first time in over a decade more people are choosing to buy a home rather than rent. An improving economy, low interest rates and rising costs of rent have all factored into this change; however, it can be argued that the real driver behind making home ownership the more attractive option is simply the fact that building home equity is a sound financial decision.

Home equity is the difference between a home’s current market value and any outstanding loan balances owed on it. In simplest terms, equity = ownership and ownership in your home provides you with an asset that increases your overall net worth. The faster you can pay down your mortgage, the faster you build equity and ultimately own your home outright. For most home owners, life without a mortgage payment is very appealing and a main factor in their decision to buy vs rent.

As you read this, you may be thinking, how do I pay down my mortgage faster?  Fortunately, there are a couple different options. We’ve outlined the most common ones here:

Pay Extra This is the simplest way to build equity quicker and something anyone with a mortgage can do, assuming their budget allows it. And there lies the catch. Success with this strategy requires extra disposable income and the discipline to apply it to your mortgage. For some, this can be a challenge as it’s more fun to put that extra income toward eating out, that latest technological gadget or travel.

Refinance Your Current Mortgage:  Refinancing your current mortgage into a shorter term solves the issue of budget discipline, but the numbers have to work. For example, refinancing your mortgage with 22 years remaining into a 15-year term could make sense, but going from 18 to 15 may not. When considering this option, you’ll definitely want to crunch the numbers with a reputable mortgage lender to determine whether you’ll pay less interest and recoup your closing costs. This will largely depend on the interest rate of the new loan compared to your current one. Refinancing to a shorter term is also likely to increase your monthly payment so you’ll want to make sure it fits within your budget.

Let Your Mortgage Do the Work:  Many financial institutions offer mortgage products designed to help you build equity faster. ENB’s Wealth Builder Mortgage is designed to build equity in your home twice as fast as a traditional 30-year mortgage without breaking your budget.

Each of these options comes with advantages and disadvantages. The Mortgage Experts at Ephrata National Bank are happy to discuss each so you can determine the best way to build equity in your home. Give us a call at (877) 773-6605 or email us. We’ll help you Smile More and Worry Less.