As you reduce your loan principal, your equity increases, assuming home values are maintained. Having equity built up in your home increases the value of your investment and means that you may have increased profits if you decide to sell. Equity also provides an option for future home improvement loans, if needed.
What it Won’t Do. Although making a large payment on your mortgage does cut the interest you’ll pay, it won’t decrease your interest rate. That will stay the same on any fixed rate mortgage.
Keep making your mortgage payments. Every time you make a mortgage payment, you’ll gain a small bit of equity, as long as your home’s value isn’t falling at the same time. But don’t think that if you are paying $1,500 each month, you are gaining $1,500 worth of equity with every payment.
There are several ways to build home equity, not all of which are under your control. Home equity is simply the difference between your property’s value and the mortgage balance(s) against it. There are several ways to accumulate home equity or accelerate the rate at which you build equity.
Your home equity is equal to your down payment plus the amount of money you’ve put toward paying off your mortgage. So you can build equity simply by making your monthly mortgage payments . If you bought a $300,000 home and made a 20% down payment, you have a 20% stake ($60,000) in your house.
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Sending additional principal payments will shorten the life of your mortgage and build equity faster. In the example above, one extra payment per year would shorten the length of your mortgage by nearly four years, assuming you make all your payments on time.
One of the biggest benefits of making biweekly mortgage payments is that you build home equity faster. You may not realize it, but when you are in the early years as a mortgage borrower, the vast majority of your mortgage payment goes toward interest – not the principal balance on your loan.