by Teresa Larson, Village Real Estate, Murray Utah
20+ years real estate experience
Jan. 20, 2015
Your home could be the ultimate savings account. Think long term and how you would like to achieve financial independence. Paying a little extra each month could bring you towards no house payment sooner. Wouldn’t it be nice not to have to worry about your house payment because your home is paid off! The other scenario, maybe you knew when you bought your home that you would want to move up eventually.
Pay Extra Month
It is simple just pay an extra amount each month to your mortgage company for your home loan. Make a note on the statement stub when paying by check, or in the payment online that this is going towards principle reduction. Your loan balance will go down quicker and you will see more equity in your home sooner.
Examining the Numbers
You paid $200,000 for your home on a 30 year mortgage loan at 6% your total payment with taxes, insurance, mortgage insurance and all is $1,459.10. after seven years your balance would be about $182,224. If you paid $200 more a month, after seven years your loan balance would be about $164,768. Your home would be paid off in 21 years if you keep this up. If you paid your total payments at $1,947.71 monthly your balance after 7 years would be about $138,600 and your home would be paid off in 15 years. You can see this is a big difference in equity you can get by just using your house as a savings account.
You Gain More Equity
This extra payment on a regular basis can also come in handy if you decide that you want to sell your home and move up as your family grows or circumstances change. The extra amount you have been paying will give you a larger down payment on your new home if market conditions have been improving. Keep in mind that it usually takes at least seven years before you begin to normally see enough equity to help you cover the cost of selling and a down payment on a new home.
When you purchase a home and generate a loan on the home you have a beginning balance of the new loan. As you pay on the loan each month the loan balance goes down. It moves slowly at first. A fifteen year loan will see larger increases in equity faster than a 30 year loan. If you pay some extra each month your loan will pay off even faster.
Market Value and Equity
The Equity in your home is also determined by market value. As you live in the home the value will increase or decrease from year to year depending on market conditions. This will also determine the amount of equity you have after you subtract the loan balance. The value of your home is determined by a buyer who is willing to pay a fair market price.
Thinking of Selling
A selling price is usually determined buy you as a seller with a real estate agent together you look at similar homes within your neighborhood area that have sold within the last 3 months. This gives you the closest approximation of value. You need to consider differences in square footage, bedroom and bath count, landscaping and improvements such as recent updates. The overall care you give your home as you live in it will be a factor in value also. All of these things play into the actual price a buyer will pay for a home.
An appraisal would give you an actual opinion value for your home but you will have to pay out of pocket for that. The fee is $400-$500. Most real estate agents will help you determine a selling price for no cost. They do this hoping to get the future listing of your home when you decide to sell.
Your Home as an Ultimate Savings Account
Using your home as an ultimate savings account is a great idea. You can’t make withdrawals after you have put the money towards your loan like you could on a regular savings account. This is a long term investment with great rewards. Suppose you have some difficulties or need the money for something important you can always get a home equity line to access the money. I discourage this unless it is your last resort. Doing this sort of defeats the purpose of getting your home paid off early or growing your equity in your home. Think long term and how you would like to achieve financial independence.
©Teresa O Larson PC, 2005 – 2015