The Owner's Perk
Owning a home or property is one of the biggest purchases you will probably make. It also represents an important milestone in one’s life. I have already touched on some of the benefits of buying vs renting - but today I am going to discuss one of the perks of owning a home - the home equity line of credit and mortgage refinancing. Both of these are versatile tools that allow you to leverage your house to squeeze out extra cash for investments, big purchases and other endeavours. While I do not necessarily suggest using these vehicles - they are only options available to property owners.
1. Home Equity Line of Credit.
So if we flashback to the simple mortgage payment. A mortgage is basically a loan to purchase a property. Suppose a property cost 400,000 and you were able to put 25% down which is 100k. You would need a mortgage totalling 300k.
Mortgage Payment = Principal Portion + Interest Portion - every month you pay your mortgage you are reducing the amount you owe to the bank. This reduction in the amount you owe is the equity you have in your home. The Equity represents the value of the principal that you have paid off.
2. Mortgage Refinancing: Mortgage refinancing is the process of taking your existing one and replacing it with another one. One of the biggest reasons that this occurs is because of the rate environment which allows you to secure a lower interest rate then the one you are currently paying. Although they are costs to break a mortgage early - the potential cost savings by reducing your rate by 1-2% can be huge. Considering that most mortgages last for 5-10years the cost savings are extended throughout that time frame. The additional cost savings can be used to further paid down debt and invest.
Suppose you had an initial mortgage 300k for 10 yr fixed term at 4% with a 25yr amortization period. Amortization is the process of spreading the payments for a large asset over a long period of time.
Refinancing can be a great option if it reduces the mortgage payment or helps you build up equity in your home faster. Remember that they are costs to refinance so it's important to do a cost-benefit analysis to see if it is worth it. It can be a good way to get debt under control and free up some more disposable income for investments.
Disclaimer: All of the above information is my own personal opinion. Examples shown are for learning purposes only. Please seek advice from a licensed representative when making any investment/mortgage decision. Please verify all risks/benefits when considering either option.
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