Should You Refinance Your Mortgage to Build Equity Faster?

Home equity is the difference between your house’s current market value and the amount you still owe on your mortgage. Speeding up the rate at which you pay down your loan balance can help you build equity faster.

How Can Refinancing Help You Build Home Equity?
If you refinance your mortgage and switch to a shorter term, your monthly payments may increase substantially, but you will chip away at the principal faster. Refinancing to a mortgage with a shorter term may also help you qualify for a lower interest rate. Because of that, plus the fact that you will be paying interest for fewer years, you will pay less in interest overall with a shorter loan term.

Is Refinancing to Build Home Equity a Good Idea for You?
If you refinance your mortgage, you will have to pay thousands of dollars in closing costs. It may take several years for you to reach a breakeven point when the amount you saved in interest by refinancing equals the amount you paid in closing costs. If you move before then, you won’t save money by refinancing.

A higher monthly payment can allow you to pay off your mortgage faster, but you should think carefully about whether you can afford it now and will be able to afford it in the future. If you take on a higher mortgage payment that you can’t cover, you may wind up with a lower credit score and may even lose your home in foreclosure. If your or your spouse’s job security is in question, you may regret taking on a higher mortgage payment.

If you haven’t contributed as much as you would like to retirement accounts or college savings accounts for your kids, increasing your monthly mortgage payment may not be a smart financial move. Doing so may not leave you with enough room in your budget to put money toward those other important long-term goals.

What are Other Ways to Build Equity Quickly?
There are several ways to pay down your mortgage balance and build equity faster without refinancing. For example, you can pay more each month, make 13 payments per year instead of 12 or pay a lump sum when you receive a gift, bonus or income tax refund. Check your loan terms so you don’t get charged a prepayment penalty.

If you take one of these approaches, you won’t have to pay closing costs like you would for a refinance. Another benefit is that you will have flexibility. If money is tight one month because of an unanticipated expense, if you or your spouse experiences a job loss or pay cut or if you decide to focus on another priority, such as saving to put a down payment on a new car, you will be able to simply make your regular required mortgage payment.

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