Mar. 9, 2018.
What’s the number one get-your-finances-ready-for-a-mortgage-payment (or another one of life’s expenses) tip loan officers suggest? The answer may surprise you.
For most of us, when it comes to our financial planning, the outlook ain’t so grand. Four out of five of us think we could do a better job of managing our money and preparing for the future, yet only a third of us are creating a plan of action. As a loan officer, Kelly Marsh, Cornerstone Home Lending, Inc., Vice President, says if she could tell her borrowers one thing, it would be to put together a monthly budget. “Understanding where our money is going is a very smart thing for all of us to do, even if we already own homes.”
Do you want to save more money? Buy a house? Pay off your home and move into a bigger one? You’re in luck. Using Marsh’s foundational advice, you can learn how to break down your big-picture plans into short-term financial goals that can help you get where you’re going faster.
If you’re paying too much for your mortgage, you’re going to have a hard time paying your bills. Contact a loan officer for help.
4 ways to plan for your future — using your mortgage
As you start crunching numbers to create your personal financial plan, you’ll soon realize your mortgage is a big piece of the pie.
Here’s how to make it work in your favor:
1. Set a goal.
Making a smart, profitable, and achievable financial plan starts with setting a reasonable goal you can reach within a few months or years. Decide on a goal, and you can start moving toward it with a money management app like Mint or Wally. If a new home or refinance is in your future, this should be a major component in your financial goal-setting.
It can be that easy.
John Hansbrough of Hansbrough Financial & Insurance Services says, “The best way to make progress with anything is to measure it. Just as you would step on a scale every day, you should check your spending every day. Tools like Mint help you begin to see where your money goes every single day, and you’ll naturally begin to make better spending decisions.”
Common budget targets are also widely recognized, like spending no more than 10 percent of your gross income on utilities, no more than 15 percent on food and transportation, no more than 28 percent on credit card debt and personal debt including car loans, and no more than 38 percent on total debt including your mortgage. (Note that 38 percent is the preferred debt-to-income ratio and is lower than the 43 percent recommended by the CFPB.)
- Federal Trade Commission Consumer Budget Worksheet
- Dave Ramsey Quick-Start Budgeting
- Armed Forces Benefit Association (AFBA) Financial Goals Worksheet
- Download the money-management app of your choice or budget by hand using one of the worksheet resources above. (Our borrowers like Mint and Wally, the apps we suggested, and free versions are available.)
- Take 15 minutes or longer to review your finances and plug in your budget.
- Make sure to include your long-term financial goals, i.e., saving for a mortgage, within your budget.
- Set a small and achievable goal first: Plan to stick to your budget for one month.
- Contact your loan officer to get prequalified for a mortgage, if you haven’t already. This will tell you how much you can afford to buy so you can plug the number into your new budget. If you’re a homeowner, ask your loan officer how refinancing your mortgage could potentially lower your monthly payment.*
Get the ball rolling. Download our free LoanFly app to prequalify, request a mortgage rate, and calculate your monthly payment.
2. Lay the foundation.
Getting prequalified for a mortgage or refinance in the previous step can give you great insight into which long-term goals are feasible for you and your family. We consider getting prequalified for a home loan to be the most important first step you can take in making a sound financial plan. Since your mortgage is likely to be among one of your biggest monthly bills, you can use this estimate as a baseline budget for the rest of your monthly expenses.
A monthly budget app or worksheet is an excellent jumping-off point and may be enough for most people. But breaking down your budget by the day can help you to reach your financial goal sooner and gain even more control of your finances.
David Lashkhi created his free Daily Budget Planner app for just this reason — to make day-to-day budget tracking as easy as possible. He says, “Let’s say you’re getting $3,000 after taxes monthly, and you want to save at least $300 a month. So, you can spend $2,700 monthly. You divide this amount by the amount of days in a current month and get your daily limit: $2,700/$30 = $90. This means that whatever you do, you can’t spend more than $90 daily.” Lashkhi says he’s used his method to successfully save money because – in his opinion — it doesn’t really matter what “category” we spend our money on, whether food, clothes, fun, or bills. The only one thing that matters is the amount itself.
“If you have spent less, for example, $50, the extra $40 is adding to your next day’s limit. Then you have $90 + $40 = $130 to spend the next day. If you exceed your daily limit by $10, for example, this amount will be deducted from your next day’s limit: $90 – $10 = $80,” he says.
- American Consumer Credit Counseling Daily Expense Tracker
- Time Magazine’s 101 Ways to Make $1,000 in 2018
- Life or Debt TV’s Run Your Family Like a Business Workbook
- Download the daily budget app of your choice or use a worksheet resource above.
- Take 15 minutes or longer to review your goals from step one and calculate your daily budget.
- Look specifically for areas where you can shave off unnecessary daily expenses.
- Take action when necessary, i.e., cutting off a streaming service you no longer use.
- Compare your new daily budget to the home loan amount you prequalified in step one to see if you’ve freed up more funds for your down payment, monthly mortgage payment, or other financial goals.
3. Decide on a down payment.
Many people are under the impression that a bigger down payment is better, though that isn’t always the case. Based on the current state of your finances, your mortgage lender will be able to tell you if a 10 or 20 percent down payment offers a larger profit and will be worth your investment. Once you have an idea of how much you’d like to put toward a down payment on a house, you can start routing a set amount into your savings each month.
You can use this approach to pay toward a monetary amount for a down payment, paying off a mortgage, or saving for your kids’ college tuition.
The easiest and lowest-cost way to stay on track toward your goals is to set up multiple accounts, with one dedicated to each goal, Adam M. Grossman, financial planner, investment advisor, and founder of Mayport Wealth Management, says. “For short-term goals, use an online bank like Ally or Capital One. These allow you to create, at no cost, multiple online savings accounts. You can give each one a nickname — for example, ‘New Car’ or ‘Vacation’ — and you can connect them to your checking account, facilitating regular contributions,” Grossman says.
For longer-term goals, Grossman suggests using the same concept: Set up individual accounts earmarked for each major goal. “These might include funds for a home down payment or for college. Again, there is no cost for multiple accounts, and because all your accounts are consolidated on one screen, there is very little complexity,” he explains.
Marsh agrees and often suggests to her borrowers that they create a “House Savings Account.” This, explains Marsh, gives you a clear goal of what it is you’re saving for and will help motivate you. “If your employer has a 401(k) program, I also recommend contributing to this for your future. Check with your employer if you can ever borrow from your 401(k) as this can be a great way to put money away for your retirement as well as borrow against for a new home purchase,” she adds.
Marsh notes that not all 401(k) plans allow access to the funds, so always check with your employer.
- NerdWallet’s Best Banks for Multiple Savings Accounts Guide
- Charles Schwab Retirement Needs Worksheet
- Cornerstone Home Lending Mortgage Payoff Calculator
- Get in contact with your bank or choose another bank you trust and request information about setting up multiple savings accounts. You may also find this tool in your bank’s online portal.
- Set up at least one extra savings account with the nickname for your goals.
- Automate the amount allotted for this financial goal in step one for monthly deposit.
- Talk with your employer or another financial investor about starting or continuing to invest in your 401(k). If you’re planning to buy a house, find out if you can borrow from your 401(k) for a down payment.
- Check in with your loan officer to see if your savings goals match your home purchase goals — and ask if extra funds from a 401(k) or another savings plan could get you there sooner.
Consider minimizing your expenses with a mortgage refinance if it’s your goal to pay off your home early.*
4. Create good financial habits.
You made a basic financial plan that most likely centers around saving up for a new home, trading up, or paying off your mortgage. Now it’s time to put that plan into action.
Financial professionals endorse healthy money-management habits like:
- “Always pay your bills on time,” Marsh says. Late payments hurt your credit scores, and your credit rating has a big impact on the interest rate you’re able to get on a mortgage.
- Set aside at least 10 percent of your monthly earnings.
- Decide on a retirement age.
- Save money for your children’s future.
- Keep an emergency fund that equals at least 3-6 months of your living expenses.
“The amount someone owes on their credit cards compared to their credit limit is another factor that has a big impact on credit scores,” says Marsh. “So try not to owe more than 40 percent of your credit card limits.” For example, if you have a $5,000 credit card limit, try to never exceed $2,000 in what you owe. These habits will not only help create good financial health — they’ll help you to qualify for a mortgage loan easier.
This “best practices” list can get overwhelming, which is why Hansbrough recommends saving in the proper order.
Build an emergency reserve — a good rule of thumb is three months of living expenses, he confirms. Then save to invest for the future, not the other way around. “Let’s say you get in an accident and need to make a down payment for a new car. $5,000 sitting in your 401(k) isn’t going to be very helpful to you because you will pay taxes and penalties to access that money. Instead, build your savings so that you have a financial cushion in the event of an emergency or sudden necessary purchase,” Hansbrough says. If you’re having a hard time getting these habits to stick, we recommend meeting with a financial advisor.
“I always tell my clients if they have any other debt that isn’t a mortgage, then this is probably what you want to focus on paying off first,” Marsh says. “If you have no other debts, and your goal is to pay off your home, then it is always good to look at shorter-term loans. Every situation and client is different. So it is a good idea to have your mortgage consultant review your specific goals and come up with the right mortgage strategy.” Since a mortgage is usually someone’s largest debt and their largest asset, Marsh says, it is extremely important to manage it well.
- myFICO Understanding Your FICO Scores Booklet
- Consumer Finance Debt Worksheet
- Fidelity Investment Strategy Guide
- Choose one healthy money-management habit from the list above and put it into practice this week.
- Contact your creditors to find out how much debt is owed.
- Add this to your monthly budget or seek credit counseling, if necessary.
- Set up one more monthly savings account to automate funds for an emergency reserve. Every little bit counts.
- Meet with your loan officer to see how paying down debt may affect how much home loan you can prequalify for or the amount you currently pay on your mortgage. Work together to come up with the right mortgage strategy for you.
You’re not alone. We can help.
In early 2016, Northwestern Mutual released the results of a survey conducted on over 2,646 adults in the U.S., ages 18 and older. The study revealed that 80 percent of Americans are lacking confidence in their ability to achieve their financial plan. And only 32 percent of people feel they have a clear view of their financial picture. While we are not professional financial planners, we are mortgage lenders who have spent our entire career helping our borrowers make wise decisions on the biggest financial purchase of their lives. Because of this experience, we can help you hammer out a major component of your financial plan — your mortgage — to allow many of the other pieces to fall into place.
Make a plan, meet with your loan officer and financial planner, and take actionable steps each month to move you that much closer to your goal, whether it’s buying a new house or putting your kids through college. We can’t wait to see you at the finish line.
*While refinancing could make a significant difference in the amount you pay each month, there are other costs you should consider. Plus, your finance charges may be higher over the life of the loan.
Cornerstone Home Lending, Inc. and its affiliates do not provide financial planning, tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, financial planning, tax, legal or accounting advice. You should consult your own financial planning, tax, legal and accounting advisors before engaging in any transaction.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.