Receiving the Best Home Mortgage — and Managing it Right
While 91 percent of homeowners deem equity in their primary home as an important financial asset, a survey released last week reveals that many may overlook their home as a useful financial tool. That means there’s a gap in understanding of how to make the best use of a new or existing mortgage loan.
“There’s a prevalent misperception about mortgages that may prevent many Americans from realizing their home’s full financial potential,” said Dan Hanson, managing director of Countrywide Home Loans. “A number of home buyers and homeowners are not factoring in the prominence of a mortgage in their overall financial portfolio and do not manage it as they would any other significant investment.”
Even amid reports of some Americans’ reckless financial habits, the study portrays a more conservative consumer who prefers not to leverage their home’s equity. Six in 10 homeowners would consider tapping equity as a source of funds and 70 percent say they would use money for home improvement loan purposess.
To help home buyers better understand the mortgage process, here are the following tips following tips for finding the right mortgage:
1. Evaluate Earnings. Beyond determining current income, it’s important for home buyers to realistically evaluate earning potential. If an anticipated increase in pay can accommodate possible higher monthly payments, then adjustable-rate mortgages (ARMs) or fixed-period ARMs with lower initial rates may make sense.
2. Be Savvy. It is critical that buyers understand the many details of this significant transaction and are ready to take on the responsibility. Home buyers should learn about financing options relative to their unique situation and honestly assess their ability to manage finances.
3. Estimate Equity. Buyers can factor in how quickly they hope to build equity in their new home. Typically, balances decrease fastest with 15-year fixed-rate mortgages. In addition, conditions such as the rate of appreciation or in home values in buyers’ local market should be factored in. Before you take out a home equity loan or a traditional mortgage, give this careful thought.
4. Factor Fluctuations. Income fluctuations from commission-based jobs or self-employment should be taken into account, as well as other income (e.g., alimony, quarterly dividends, etc.). Home loans with payment option features may allow flexibility to pay the minimum required in leaner months and fully amortized payments or more during periods of increased income-as long as you understand the potential added costs from payments resulting in deferred interest, rising rates, or re-amortizing interest-only mortgages.
Now that you’ve settled on a mortgage, you may want to take a closer look at your monthly mortgage statement. A home mortgage may be leveraged as a strong financial asset. Here are tips for best managing yours:
1. Consider Cash-Out. Cash-out refinancing can leverage equity as a source of funds needed to meet personal and financial goals, including home upgrades that may add to the property’s value in the long run.
2. Investigate Interest. Obtaining a new home loan may be a smart move when you have a current mortgage with an adjustable interest rate that’s on the rise. They may consider loans with a lower rate, a fixed payment, a different loan term or other features that match their current financial situation or long-term goals.
3. Aim for Another Home. Using home equity from a first home can help homeowners springboard into a second home or investment property to significantly build assets.
4. Unlock the HELOC. Homeowners may choose to open a home equity line of credit (HELOC) to tap funds from available equity to be used for multiple purposes, or in an emergency. Interest rates and monthly payments are generally lower than on credit card or installment loans and the interest paid is often tax deductible. Plus, payments are not due until money is accessed, so an unused line of credit can be a safety net for emergencies.
5. Reflect on Reverse Mortgages. Homeowners over 62 years may consider a reverse mortgage to access equity as a source of additional funds. These programs can allow seniors to remain in their homes for as long as they wish, while receiving tax-free loan proceeds. Typically, the final amount owed does not exceed the appraised market value at time of loan maturity.