Go for Equity

Another way to look at the problem is to ask yourself what you want from your home in addition to its shelter value. Choose a mortgage that helps move you closer to those objectives.

Suppose that ten years from now you will need a home-equity loan to finance college educations for your children. From your perspective, tax benefits

Are you buying a home for more than just shelter? Choose a mortgage that helps you move closer to those objectives.

from mortgage-interest payments are less of a priority than equity buildup. You could accomplish this by making a large down payment, of course, and borrowing it back as necessary. If that's not possible, you could choose a 15- or 20-year loan—using the mortgage as a form of forced savings, as it were. Or you could opt for a fixed-rate 30-year mortgage and make additional voluntary payments against the principal. (Before you choose the latter, determine whether your loan contract would permit the lender to charge you a prepayment penalty. If so, and you can't get that provision removed, chances are you'd do better not prepaying but investing that extra sum elsewhere.)

Before embarking on a major campaign of prepaying principal, however, give thought to alternative uses of the money. What kind of return on your money could you anticipate from stocks, bonds, mutual funds and other types of investments? How does that compare with the amount of equity you could "accrue" in your home over the same time period? Keep in mind that once you put money into repaying your mortgage, you will earn no current income, and you can get it out only by borrowing it back via a home-equity loan or some sort of refinancing.

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