If you own a home, you either have equity or you're underwater.
Equity means your home would sell for more than you owe. Your equity is the difference between how much you owe and how much your home is worth.
Underwater means you owe more than it would sell for.
If you bought your home with a small down payment (3% to 5%) and a year later your property value declined by 10%, you'd be underwater.
But most homebuyers don't worry when they buy because they plan on living in their new home longer, giving them time to build equity.
Already Have Equity?
If so, you can hold onto it or cash some of it out.
If you hold onto it, you'll eventually pay off your mortgage and own your home free and clear. This usually takes most people 20 to 30 years.
But a lot of people, especially first-time homebuyers, don't live in the same home for 20 to 30 years.
They often buy larger homes as incomes and families grow.
Then later move into smaller homes with less upkeep to allow for travel or hobbies on retirement incomes.
What if You Were To Convert Some of Your Equity Into Actual Dollars?
You could use it for the down payment on your next home and flip your current home into a rental property.
You could invest in your retirement fund, mutual funds, stocks, bonds or crypto.
You could take a few years off to travel the globe while flipping your current home into a rental.
You could supercharge your children's college fund while they're still young, so it has time to grow.
When Planning Your Future, Look at Ways Your Home Equity Could Help You Achieve Your Goals.
If you decide to access it, you have two options:
1. Cash-out refinance
2. Home equity loan or line of credit
A cash-out refinance replaces your current mortgage with a larger one. You get a lump sum of cash and a month or two off with no mortgage payment.
Home equity loans are a 2nd loan on your home. Your current mortgage stays in place, a 2nd loan goes in place, you get a lump sum of cash, and a month later you'll start making two mortgage payments: your regular one and a 2nd small payment.
When Considering Whether To Tap Into Your Equity or Not, It's a Good Idea To Look at Your Broader Financial Picture.
Refinancing and home equity loans typically have costs associated with them that are rolled into the new mortgage.
Even though you may not be paying for these costs out of pocket, you're still paying for them with equity.
That's why it's important to make sure you plan to keep the new mortgage long enough for the benefits to outweigh the cost of equity you paid.
Consider how long you'd like to live in the home, if you'd sell it or convert it into a rental, and how your home fits into your personal financial plan.
For more details and a place to add your comments, search Home Equity on our blog.
The mortgage is most homeowners' single biggest expense, so it makes sense to regularly look into options for lowering the rate, payment, and total interest paid over the life of the loan.
But just because the interest rate is lower doesn't mean you should automatically say yes to refinancing.
And just because the closing costs and points are thousands of dollars doesn't mean you should automatically say no either.
Do You Plan To Keep Your Home or Sell It?
When looking at the interest rate and mortgage payment of a proposed new mortgage, also look at the closing costs and compare all of these numbers to the years you plan to keep the new loan.
If it will take 10 years for the payment savings of a refinance to cover the closing costs and points, and you're planning to sell in five years, you're better off looking at options with lower costs or not refinancing at all.
But if the refinance will save you $35,000 in interest over the next seven years, the closing costs and points are $5,000, and you plan on keeping your home for seven years at least? That sounds like a winner.
If Refinancing Doesn't Make Good Financial Sense and You Still Want To Save on the Interest You Pay, Begin Pre-Paying.
With most mortgages, you can pre-pay an additional amount directly towards the principal balance.
This means the extra amount you pre-paid towards the principal balance will NEVER be charged interest on top of interest, month over month, year over year.
If you've only got five years left on your loan, it won't make much of a difference because most of the interest has already been paid. There's not much left to shave off.
But if you've got 15, 20, 25 years or more remaining, there's a lot of road ahead of you and starting now with additional principal payments - then remaining consistent - can make a huge financial difference in your life.
The cost for home insurance can vary hundreds of dollars a year from one insurance company to the next, so shopping around can be worth the hassle.
Even if your home insurance is included in your monthly mortgage payment, you can still change insurance companies.
Shop around first. Just give a copy of your current insurance declarations page (dec page) to the insurance agent providing the new quote.
Ask the agent to explain the different types of coverage you have listed on your current dec page.
Ask if she or he has any suggestions for changes in coverage.
Then, if you want to switch, your mortgage servicer can help you with their process.
Start This Process With Your Mortgage Servicer 60 Days Before Your Current Policy Is Scheduled To Renew.
One thing to watch out for:
If you request an insurance quote online, some sites sell your info to multiple insurance agents who will call and text you non stop for weeks. Even after you've said no thanks.
Not all are that way, but some are. Know what you're signing up for or else you could be dealing with their calls and texts for weeks or months.
If you want a home insurance quote without sharing your phone number and email with the insurance agent, email a copy of your dec page to [email protected]
For more details and a place to add your comments, search Home Insurance on our blog.
Mortgage insurance is required on some loans. It helps cover the lender's losses if the home goes into foreclosure.
Since it doesn't actually benefit the homeowner and can cost hundreds of dollars per month, it's a good idea to look into ways to have it removed.
There are two types of mortgage insurance:
1. Mortgage insurance premium (MIP) for FHA loans.
2. Private mortgage insurance (PMI) for conforming loans, also known as conventional, Freddie Mac or Fannie Mae loans.
For FHA loans, the mortgage insurance requirement varies based on your FHA Case Number assignment date and loan-to-value (LTV).
If your case number was assigned between January 2001 to June 3, 2013, then your MIP will be cancelled once you reach an LTV of 78%.
If your case number was assigned after June 3, 2013 and your LTV at the start of the loan is 90% or less, then the MIP remains for 11 years.
If your case number was assigned after June 3, 2013 and your LTV at the start of the loan is greater than 90%, then the MIP remains for the entire term of the loan.
Another Option for Removing FHA MIP Is to Refinance Into a Conforming Loan.
If you already have a conforming loan, the mortgage insurance is removed once your LTV reaches 78% or less, and also meets a minimum of two years.
But it can be removed early if you have 80% LTV and meet the two year minimum.
To calculate your loan-to-value, divide your loan balance by your home's value.
For example: $530,000 mortgage balance divided by $700,000 value = 75.7% LTV
You'll need to know if your servicer will use your last appraised value or a new appraisal so reach out to them for their policy.
They can also fill you in on the process and let you know who pays for the appraisal if one is needed. (It's typically the homeowner.)
For more details and a place to add your comments, search Mortgage Insurance on our blog.