Refinancing to a shorter term of payments or a lower rate of interest can be a great way to give the equity in your home a boost. Your money will work harder where it really makes a difference. Instead of simply paying a lender for the convenience of borrowing, you'll actually pay yourself in the form of real estate equity.
Surefire ways to generate "refinance equity"
The following three ideas can help you generate equity in your home:
1. If you have an interest-only mortgage, your payments do nothing to chip away at your mortgage principal. By picking a mortgage refinance that allows you to pay off principal, you'll automatically begin to build mortgage equity over time. Many experts recommend a mortgage refinance for interest-only borrowers as a method of getting out of debt and into equity.
2. Even if you have a traditional fixed rate 30-year mortgage, you can refinance to a shorter term to pay less interest and accumulate more equity. For example, if you have a fixed-rate 30-year loan, you can shorten the life of the loan to 10 or 20 years. By paying interest based on 10 years of borrowing instead of 30, you'll save two decades' worth of interest payments. And you contribute sooner-and more substantially-to paying off the principal.
3. If you're currently paying off an older mortgage that carries a higher rate of interest, you can refinance to a lower rate and wind up saving many thousands of dollars during the life of the loan. This is one of the more straightforward ways to make a mortgage refinance work for you to generate equity.
You can always create equity by directly paying off a chunk of the principal on your loan; but for most of us, that isn't a practical solution. A much easier and pragmatic approach may be to look at your various refinance options. A good mortgage refinance will still fit your budget, but allow you to contribute more of your monthly payment to paying off principal, and less to merely servicing your outstanding debt.
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