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Monday, September 04, 2006

Insider Tip: Use Your Equity

I described the concept of equity in my last post, and this time I want to tell you how to make it work for you.

In the situation I described before the owner had $60,000 in equity due to $10,000 from down payment, $20,000 from principle repayment and $30,000 from property appreciation. The original loan was at 90% LTV, now paid down to 61.5%. However, the loan was originated at 90%, so the borrower is still paying for the high original LTV. Refinancing could seriously lower monthly payments if the prevailing rates are similar or better.

The equity can also be put to use as a home improvement loan. This further improves the value of the house, though always by less than the loan. However, it further improves your LTV and allows you to repeat the cycle with the help of appreciation.

The equity can also be used to pay down other higher interest debt, such as credit card debt. This can be somewhat risky though, as you are replacing unsecured debt with secured debt. In other words they don't take your house when you don't pay the Visa bill, miss some loan payments and they will. For a disciplined borrower this can be a useful strategy though.

Equity can also be invested in other properties or other investments, though obviously with the same risk noted above. Equity can also be used as a way to save for larger and larger down payments on newer and bigger houses. This is what The Mortgage Insider suggests unless you can remove higher rate debt with a debt consolidation refinance at reasonable rates.

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