Dec. 21, 2017.
Whether you’re hoping to buy a house in the upcoming year or just want to get a better handle on your finances, using one or more of these tips may help to make your mortgage more manageable — and in some cases, lower your payment.
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How to make managing a mortgage easier than they say it is
If you take any mortgage advice away from 2017, let it be one of these lender-backed tips:
1. Include your mortgage in your financial planning.
You might have several big-picture financial goals you want to address in the next year. Make sure your mortgage is one of them. Charlie Donaldson, MBA, College Funding Advisor at College Bound Coaching, points out that there are cases where your mortgage can factor into your other financial plans, making them more or less attainable. For example, Donaldson says, “The amount of your home equity can count against you when attempting to get financial aid to pay for your child’s college education, potentially costing you tens of thousands of dollars each year your child is in college.”
Do this: If you find yourself in this predicament, it could be helpful to meet with your financial advisor. When planning for a large goal like a child’s college, Donaldson says, understanding how finances can help or hurt you can make a huge impact on the affordability of that college degree you want for your child. “Simply saving up a bunch of money but having it in the wrong place could do more harm than good,” he explains.
2. Start saving for a down payment.
Having extra cash lying around isn’t a phenomenon most of us are familiar with. (66 million Americans have zero dollars saved for emergencies.) If you aren’t used to saving, but you now have a savings goal of a down payment on a house, this should make it easier, Naomi Grossman, Project Manager at Profile Investment Services, Ltd., says.
Do this: “The first step is to automate your savings so that a certain amount will be put aside into an account whenever you receive your salary. You won’t even feel the money go out,” Grossman explains. “Each month, as you put the money aside, visualize another brick in your new home as you get closer to your goal.”
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3. Or, make extra mortgage payments.
If you’re already a homeowner and are short on savings, you too can utilize Grossman’s financial tricks. Paying ahead on a mortgage is not something many people do in a lifetime, but it’s possible, says Grossman, when you start off small. Change your financial habits gradually, she says, because if you take on too much at once, you may feel intimidated.
Do this: At the beginning, Grossman recommends choosing one small thing that you can do. For instance, consider automating a small amount to use for an extra mortgage payment within the year, as Grossman described above. “Once you have acquired this habit, move on to the next stage,” she says. If you’re able to make one extra mortgage payment in a year, increase that amount to two or three, and so on.
*As a note, this is also an ideal time to consult with your loan officer about the pros and cons of paying off your mortgage early. Financial experts remain divided on this topic as potential mortgage payoff benefits are related to personal circumstances, including existing debt.
4. Try to refinance and lower your monthly payments.
Refinancing your mortgage simply means you’ll be replacing your current mortgage with a new home loan. You’ll get a new rate, new terms and conditions, new closing costs, and the possibility to choose a new lender. Refinancing can be a good idea when mortgage rates are low (as we saw in the past year) or when and if your home has seen a big jump in its market value.**
Do this: Set up a quick meeting with your loan officer to see if you could benefit from a refinance to reduce your monthly mortgage payments. You could also refinance to consolidate your credit card, loan, and other debt to lower your interest rates; to finance home renovations or extensions by using the equity on your existing home; or to get a new home loan with better features, like an offset account or redraw facility.
Whether or not you ultimately decide to refinance, taking a closer look with a qualified professional can give you insight into important numbers that impact all areas of your yearly financial planning. “Advice to a beginner would be to know your numbers inside and out, how much money is coming in, and, more importantly, where it is being spent,” John Savin, owner of Savin Wealth Management, says. “As life brings changes, the new info is used to course correct the roadmap to keep the plan on track.”
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5. Don’t stretch your mortgage budget too far.
It’s easy to get carried away with the “excitement,” as some might call it, of financial planning for the year ahead. But take a moment to put your goals and your numbers in perspective, especially when budgeting your monthly mortgage. This can apply to both refinancing and buying a house. “Standard guidelines call for keeping housing expenses below 35 percent of total income,” Kevin Gallegos, consumer finance expert at Freedom Debt Relief, says. “Some experts are revising that number down to 28 percent.”
Do this: Gallegos advises leaving “breathing room” in a budget to help secure a home or pay for a mortgage even if something unplanned occurs. Also, check in with your loan officer to find out their recommendation for how much of your total income should be spent on housing.
6. Understand your private mortgage insurance (PMI).
If the “PMI” associated with your monthly mortgage has always confused you, this could be your year to find out. “Mortgages with less than 20 percent equity (which means a 20 percent down payment for those purchasing a home) require PMI in case the owner defaults on the loan,” Gallegos explains. “This is added to the monthly payment.”
Do this: Get in contact with your lender to discuss the remaining balance on your mortgage — and when your PMI, if you have it, can be dropped. “When the homeowner pays a conventional mortgage down to 80 percent or less of the home’s value, the homeowner can request the lender to cancel the PMI and then be able to stop paying the additional amount,” Gallegos says.
7. Pay attention to your credit report and scores.
With the recent Equifax disaster in the news, we saved this biggie for last. There’s no better time to get acquainted with your credit score, which has a direct impact on your mortgage rate. Start by requesting the free annual credit report you are entitled to at AnnualCreditReport.com. Freddie Huynh, a lead data scientist at FICO (Fair Isaac) for 18 years who is now Vice President of Credit Risk Analytics at Freedom Financial Network, explains, “A credit report contains a detailed listing of all your debts and payments, going back through your entire payment history. For each credit account you have, the report shows creditors’ names, the amount owed, the highest balance owed, available credit, whether the account is open or closed (and who closed it), the number of times a payment was past due, and whether the account is in default.”
Do this: Understand what your number is before buying a house or refinancing a mortgage. A higher credit score indicates better credit and can help you get a better mortgage interest rate. “While there are many factors that go into play, in general, [it’s] the higher, the better,” Huynh explains.
It’s important to note that while credit scores are an important part of the lending process, they are not the sole criterion. Huynh reminds us that other factors – such as income, outstanding debt, debt-to-income ratios, and other information on credit reports – can influence whether you’re approved for credit and the rate you qualify for. “Lower scores can still qualify for a mortgage but generally will obtain slightly higher mortgage interest rates,” he says. “High credit scores represent better credit risk than lower scores.”
Need help with one or more of the tips listed above? Cornerstone is in your corner. Download our free LoanFly app to get in touch with your loan officer from wherever you are — and to find out your credit score after you prequalify.
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**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.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.