I’ve been exploring the parts of a mortgage payment and how changes in the rate and price affect your payment. This week the topic is Building Equity in Your Home. Many home owners don’t necessarily stay in their home for decades but it is still a good idea to pay down your mortgage and build equity.
If you have a fixed rate mortgage, your mortgage is designed to be completely paid off in perhaps 30 or 15 years (depending on the terms of the loan) as long as you make the required minimum payment each month. It is possible to pay extra each month or make occasional additional payments to the principal balance throughout the term of the mortgage. You can pay off a 30 year mortgage much faster than 30 years by paying more than the minimum required amount each month.
We look at an amortization schedule and see how the principal and interest part of your monthly payment changes over time. In the beginning, a large portion of the payment goes toward interest. Each subsequent month more of the minimum payment is going to pay down the principal balance of the mortgage.
In the long term, real estate also appreciates over time. As the value of the property increases, you built additional equity during the years that the real estate market appreciates. While the property may not increase in value every year, property does generally appreciate over the long term.
Points to Ponder: When a mortgage is refinanced, the term of the loan may be lengthened. For example if someone has owned their home for 5 years and made all required monthly payments on a 30 year fixed rate loan, they have 25 years left to pay before the loan is fully amortized or paid off. If they refinance the loan and get a new 30 year fixed rate loan, they just restarted the clock on their amortization and signed up for 30 years of payments. As they were entering a point where the interest part of the payments were getting smaller, they started back at the beginning. I’m not saying that refinancing is a bad thing but the benefits need to outweigh the costs. There are times that current interest rates may be significantly lower than the rate on your mortgage and the numbers make sense to refinance. Please note that it may be possible to get a 15, 20 or 25 year mortgage so you don’t lengthen the term of your mortgage or even sign up for a shorter term.
I’m available to discuss any questions you may have about real estate in the Nashville, Franklin and Middle Tennessee area. I also have a list of several trusted mortgage lenders. Please reach out if you are in need of a mortgage lender.
9175 Carothers Pkwy. Ste. 110, Franklin, TN 37067
Each Keller Williams Realty office is independently owned and operated