Mortgage Balance Down▼ – Equity Up▲
Paying off your mortgage is a great way to build equity. It’s a normal part of the lending process, and a significant contribution to the concept of leveraging your investment.
Here’s an example:
Let’s say you purchased a $700,000 fourplex, putting 25% down at a 4% interest rate. Your monthly mortgage payment (principle + interest) would be $2,506.
At the beginning, your mortgage balance is $700,000. You are paying $ a month towards principle, and $ a month towards interest.
The principle payments are very small at the beginning. The lender wants to maximize their interest collection. However, they gradually increase and the ratio changes.
In this example, by year 5, you will have reduced your principle balance down to $473,926.
Which means you have accumulated $226,075 in equity in those 5 years. If you sold the property then, that money would go into your pocket (less closing costs, etc.) Good job!
Check out our “SMART Investment Strategy That Works” video.