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Your mortgage may feel like a bill, especially if you’re used to paying rent. And it is a bill. It comes every month, you have to pay it, and the money doesn’t go into your own account. Or does it? Unlike, say, your electric bill, the money doesn’t disappear into thin air. In exchange for your mortgage payment, you get a portion of your house. If you use our amortization calculator, you can see exactly how much of your house you’re buying every month. Your payment also includes interest, insurance, and taxes. That number for “principal?” That’s yours.
As you pay down the principal on your loan, you are building equity in your home. Put simply, equity is what you actually own. The sooner you pay down that principal, the sooner you own your home, free and clear.
Some borrowers choose to make mortgage payments equal to half of a monthly payment every two weeks, instead of paying once a month. Why? Do the math. That mean 26 half payments per year, a total of 13 full payments. Without much strain on your budget, you’ll make an extra payment each year! Besides, many people find it easier to fit bi-weekly payments into their budgets. Do you get a tax refund? A yearly bonus at work? A check from grandma on your birthday? Use it to pay down your principal, as long as your lender doesn’t penalize you for doing so. Some lenders do charge a penalty for paying off your loan early, and that will be outlined in your mortgage agreement.
Another sneaky way to build equity and pay off your loan early is by paying just a little extra each month, then refinancing to a shorter term loan. Let’s say your mortgage payment is $1,367 every month. Would it be that much harder to pay $1,400? How about a nice even $1,500? Once you’re used to paying a little more, shop around for a refinance. If you have a 30-year term, you may find that the payment for a 15-year mortgage is only slightly more than you’ve been paying, if you’ve been paying a little extra each month. The interest rate is usually lower on a shorter term loan, too, which will also make your new payment less than you think. In other words, your payment will not even come close to doubling if you go from a 30 year to a 15-year mortgage. Not even close. If you’re ten years or more into your 30-year mortgage, and interests rates have dropped since you originated your loan, your payment may even go down.
As you watch your equity build, you may also consider a home equity line of credit (HELOC) for a renovation, your children’s education, or a car. One advantage of using a HELOC instead of a car loan or some other loans is that you may be able to deduct the interest on your taxes, if you itemize deductions. The interest rates on HELOCs are variable, though, so do keep an eye on yours and make sure you aren’t getting in too deep.
Your home belongs to you, more and more as you pay down the principal on your loan. A portion of your payment each month goes directly to you, in the form of equity. Doesn’t that feel great?