Home Owner Tips on Building Equity

• Building equity -"To prepay your mortgage simply means to send the lender (actually, the servicer) more money than is required. Prepaying can save you a lot of interest, reduce the term of your loan (from 30 to 22, for example), and build equity much more quickly. Having more equity makes it possible to tap your home's equity sooner, should you need it; or it can put you in a better position to refinance if you want to. Those are worthwhile goals, but that doesn't necessarily mean that prepaying is the right thing to do in all cases.

At a time when mortgage rates remain below 7%, it seems odd to tackle the subject of when to prepay a mortgage. With mortgage debt so inexpensive relative to other debt, the prospect of accelerating repayment is not advantageous for many. Check out your options.

• Record low rates could save you a bundle.
A 30-year fixed mortgage rate of 7% is closer to 5% on an after-tax basis, after the deduction of mortgage interest from federal taxes. With mortgage rates so low, even borrowers without other higher-cost debt are better off diverting long-term investment dollars into higher-return instruments such as stocks. After all, the long-term average annual return of 10% on stocks, before taxes, still equates to 8% after taxes, assuming the long-term capital gains rate applies.

Nonetheless, there are some instances where borrowers can benefit by paying down mortgage debt, despite the relatively low cost.

• Better retirement - Consider those who are retired, or about to retire. They want to reduce expenses as much as possible, and their investments tend to be more conservative. They're also more likely to have been paying their mortgages for many years. For them, paying a little more now so the mortgage can be eliminated will drastically reduce monthly expenses. With lower expenses, there is no need to tap retirement funds for housing, allowing those funds to continue growing tax-deferred or tax-free.

• This advice isn't for everyone -If the level of retirement income is such that it keeps the investor in a high tax bracket anyway, the advantage of the mortgage-interest tax deduction remains inviting.