Home mortgage interest rates remain at an all-time low. If you’re in the market for a house, it’s a great time to buy, particularly if you are a first-time home buyer.
With interest rates so low, it’s tempting to make a small down payment and invest the extra cash. However, this may not be the best idea. Although most people have good intentions, only a few are skilled investors, and will give the necessary attention to their investments. Or they may be taken in by a “sure winner” and end up losing their shirt. Regardless, it’s not easy to find an investment these days that returns a consistently good rate. Worse yet, with extra cash in your pocket, you may not be able to resist spending it instead.
The more you put down, the less your monthly payment will be. In addition, your insurance costs, and your interest rate will be lower. As a result, you will have extra cash in your pocket each month to save, invest or spend on necessities.
One way to keep a handle on your financial situation is to make an annual balance sheet. It may sound complicated, but it is really just a list of all your financial assets and debts. If you make one every year and track your progress (or lack of progress) over the years, then you will be in a better position to understand your finances. You may be surprised by the results, and knowledge is power. After it is all done, be sure to share it with your partner so your situation is in the open.
Your assets (the things you own) should include all bank accounts, stocks, IRA’s, 401k’s, etc. Anything that has actual cash value. Do include your home equity – the value of your home minus the amount you owe on it. Don’t include physical property such as cars, clothes, collections, etc.
Liabilities are your debts. Do include credit card and consumer loans.
The only hard part is collecting all the information, and that gets easier the more you do it. The actual balance sheet can be just a list of assets with their value, a list of liabilities with their value, and your net worth (assets minus liabilities). Or you can follow the sample that I have provided here.
The numbers in parentheses are negative. This is bad. The key to having a positive net worth is getting rid of the debts. Then gradually add to the savings, and you will be on the way to wealth.
Getting a mortgage with a co-signer is not difficult. There will be a place on the loan application for co-signer information that will need to be filled out. Perhaps the more difficult thing would be to find the actual co-signer. This person (usually a relative) will have to take over the full burden of the mortgage if you stop making payments. This is a considerable financial responsibility on the part of the co-signer, and many or most people are just not willing to do this for you.
Refinancing your mortgage is just like starting all over with a new mortgage, but things may be different this time around. First of all, you might be financing a smaller amount because you have already paid off a lot of the original mortgage. Or, you might be financing more because your house is now worth more and you want to take out some of that equity. Then your interest rate may be different. You might be switching from an adjustable rate mortgage to a fixed rate or visa versa. And you might be financing for a longer or shorter time period. All these variables can be changed depending on what you want and what the lender will agree to.
For example, let’s assume you have 21 years left on your adjustable rate mortgage and your rate just went up. You notice that the fixed rates are lower, and you would like to lock in the new lower rates. Your lender might agree to a refinanced mortgage at the new lower fixed rate for 15 or 30 years. You have to pay closing costs, but you should recoup these costs if you stay in the house a few years. Over the term of the mortgage you should save a lot in interest. The longer you own the home, the more you save in interest costs.
Another example: let’s assume you have 18 years left on you fixed rate mortgage and have considerable equity in your home. You also have about $20,000 in credit card debt which you have foolishly piled up over the years. The credit card interest is really expensive and you want to get out from under that burden. (And you promise yourself never to go into that kind of debt again.) You can get the cash by refinancing your home. Maybe your lender will agree to refinance your mortgage over 30 years and return about $20,000 in home equity to you. You use the money to pay off the credit card debt and save a bundle in interest expense. Since you have extended the length of your mortgage your payment may even be lower. You will have to pay closing costs, and the lender can foreclose on your house if you can’t make your payment.
Mortgage refinancing can be a useful financial tool when used carefully.
A second mortgage works almost like a first mortgage. You can use it to lower your monthly payment, extract equity out of you home, or move from an adjustable rate mortgage to a fixed rate. You lender will redo the mortgage (charging you hefty closing costs) with a new term or balance.
For example, if you must have lower monthly payments, then the lender may take all the remaining principal that you owe and spread it out over the next 30 years. Your payment is lower, but you have to pay for a longer time.
Or, if you need a big lump sum now (to pay medical bills, for example) your lender would loan you the lump sum, add it to your mortgage principal and probably extend the mortgage for the next 15 or 30 years. You get the lump sum now, but have to pay for a longer time.
Or, if you have an adjustable rate mortgage, one in which the interest rate changes from time to time, you might want to switch to a fixed rate so you know your rate will never increase again.
You can work with your present lender or look for a new one. You will have to pay closing costs, so you won’t want to do this very ofter. And all this assumes you can find a lender who will finance this second mortgage.
First you have to decide if paying off your mortgage early is the best thing for you. It depends. If you are the kind of person who spends all the available money you have, then locking that money up in your home might be a good savings strategy. On the other hand, if you highly disciplined with money, maybe you could get better investment results without putting money into your home. For most people a moderate approach is best. Just pay off some extra on your mortgage as you go, and you will end up paying off the mortgage earlier, saving you a bundle.
There are several strategies for actually paying down the principal once you have decided to do it: 1. Pay a certain amount extra every month. Putting an extra $100 into your mortgage each month can shave years off the mortgage. Try rounding your regular payment up to the nearest $100. 2. Save up you money and make a big payment against your mortgage principal every year. 3. Move to bi-weekly payments. You make a half payment every two weeks which results in 26 half payments a year. This is the same as 13 full payments, so you are making an extra payment painlessly every year. 4. Use the haphazard approach and make a big payment against your mortgage whenever you can. Or 5. Just find you the remaining principal and pay it all off in a lump sum.
If you use any of these strategies, be sure to notify your lender that any surplus payments should apply to the mortgage principal.
If you have bad credit, it can be difficult to obtain a mortgage, but it’s not impossible.
The obvious solution is to improve you credit score. First pay off all you credit cards. Then use a reasonable amount of credit monthly and pay it all off every month. You are demonstrating your ability to pay bills on time, and this should improve your credit score. You can also get a copy of your credit score from AnnualCreditReport.com and make sure there are no errors which might be lowering your credit rating. (You can find out all about fixing such errors elsewhere in this website.)
Making a big down payment will help you get a mortgage. If you can put as much as 20 – 25 percent down or more, the lenders will look upon you in a more favorable light. You are less likely to default on your mortgage if you have a lot of you own money invested in the house.
You can also get a co-signer. This is someone (usually a relative) who will co-sign your mortgage and guarantee the payments. The co-signer is on the hook for the mortgage if you stop making your own payments. They have a heavy financial responsibility.
Apply for an FHA loan (www.fha.gov) They don’t actually give you the mortgage, but they will guarantee the mortgage, thus helping you get one from a bank.
Look into a bad credit mortgage, also know as sub-prime. These are mortgages especially made for people with bad credit, but be careful. They will charge you a higher rate of interest, and will foreclose on your house if you fall behind.
There is no legal limit to the number of times you can refinance your home. But frequent refinancing might not be the smartest thing to do. After too many times your house runs out of equity to refinance and your credit score sometimes drop. Also, refinancing is not free and your lender might have prepayment penalties.
A reverse mortgage is similar to a regular mortgage except you don’t make monthly payments to the bank. Instead, the bank makes monthly payments to you. It is a way to borrow money against the equity in your home, a good option for an elderly person who is house-rich but cash-poor. You must be at least 62 years old and own your home outright or almost own it outright. You can keep receiving the monthly payments until the principal land interest of the loan reaches the amount of the home equity.
A unique aspect of a reverse mortgage is that the borrower doesn’t have to repay until they sell their home, move out permanently, or die. If this happens, the mortgage is is usually paid off by selling the home or by refinancing into a traditional mortgage.
Let’s say you are an elderly person who owns his own home outright. That great, but you don’t have much income, maybe only a small monthly payment from Social Security. You may not have enough to live on. Your house is worth a lot, but you have no way of getting at that home equity since you want to live in your house. You could take out a reverse mortgage, get a monthly payment from the lender, and coninue living in the house as long as you want. If you move out permanently, sell the house or die, then you must repay the mortgage which is usually done by selling the house. Of course, you won’t be living there anymore.
Places to find interest rates. Try getting several quotes at the following places:
- contact your local bank