Maximize your stake; Higher, more frequent payments can help shorten term of loan

Ray Morrissey and his wife, Holly, bought five acres on a mountaintop site in Dover in 2003. This year they began construction of a custom modular house for the site.

"In that two-year time the value of the land doubled," Ray Morrissey said. "The market was getting hotter and hotter."

Now, with the house nearly complete, Morrissey, who general contracted and subcontracted the project, is pleased with the equity he's gained.

"From what we laid out in the land and what we laid out in the modular, I'm almost expecting to have doubled that in equity, if the market stays hot," by the time he and his wife move in Nov. 1, he said.

According to Dana Listemann, sales manager of Action Capital Mortgage Services in the Town of Poughkeepsie, home equity is the amount of money a homeowner has invested in his home, plus or minus the market value of that investment.

For example, a homeowner who made a down payment of $50,000 on a house valued at $250,000, would have $50,000 in home equity, Listemann said. Now, say the value of the house increases.

"Now, if the house is appraised and it's worth $300,000, you now have $100,000 in equity," without having invested more money in the house, he said.

Don't rely on rising value

Relying on rising home values as a means to boost home equity is risky, Listemann said, even though house values generally increase by 14 percent a year. If market values drop, so does the equity people have in their homes.

"Nobody knows what the market is doing and people are counting on their house values going up," Listemann said.

One way to start out with a good measure of equity is to put a large down payment on a new house, he said.

"If you put $200,000 down on a $400,000 house, you have 50 percent equity," he said. "You can tap into that at a later time."

Going with a relatively short-term mortgage also increases your equity.

"With a 15-year mortgage you generally get a lower interest rate, but your payment (monthly) increases," Listemann said.

Here, he said, more of the payments go toward the principal, which builds equity faster than it would with a longer term loan that has a higher interest rate and lower monthly payments.

Similarly, people can go with a longer-term loan, but make higher payments when possible, said Morrissey's lender, Ted Daley, senior mortgage consultant with Homestead Funding Corp. in Fishkill.

In that situation, for example, if a person has commitment for a 30-year mortgage with $1,000 monthly payments, but pays $1,250 each month instead (as he would if he had a 15-year mortgage), he'd pay off most of the mortgage in 15 years. Say some catastrophe happens.

"All of a sudden you can't make that payment," Daley said. "It's hard enough making the smaller payment. You're only obligated to make the smaller payment because that's what your mortgage commitment says."

Another way to build home equity faster is by making extra mortgage payments, which not only mean you'll be paying less interest and more of your principal sooner, but also, shortening the term of your loan, Listemann said.

Arranging for a bi-weekly mortgage can help.

Bi-weekly mortgages are where homeowners pay half of their monthly mortgage payments every two weeks, rather than making one full payment each month. Doing so results in having made a total of 13 payments in the course of 12 months.

"A 30-year mortgage done on a bi-weekly basis with no additional money applied toward principle each payment, will pay your mortgage off in about 21 years and three months," Daley said.

Interest is reduced

In this way, the homeowner would be paying less interest and gaining more equity as the principal is paid down.

So, if a person had a 30-year mortgage at 6 percent interest and made bi-weekly payments, the interest on the loan would effectively be about 4.75 percent, Daley said.

At the same time, the homeowner wouldn't have to pay tax on the 6 percent rate, since mortgage interest isn't taxable.

Some lenders don't offer bi-weekly mortgage payments, have restrictive policies on them or have pre-payment penalties on sub-prime loans, Daley said.

Maintenance adds value

Good home maintenance and home improvements also build equity.

Melinda Valentine, an associate broker with Century 21 Alliance Realty Group in Wappingers Falls said homes that look good and are well kept, sell for more money.

Keep your boiler, furnace and roof in good shape and the rooms of the house freshly painted. Updated kitchens and bathrooms, in particular, add to a home's appraised value, Valentine said. Landscaping also increases value, particularly to a home's curb appeal.

"Keep your house looking clean," Valentine said. "Don't let it fall apart."

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.