Rodney Campbell, Broker, License # 613021, Stewart and Campbell Real estate, LLC., Keep Austin Weird Homes LLC., (512)740-6486 AustinTexasAgent@gmail.com
Looking to the Future as a Homeowner
All the work you’ve done to prepare for homeownership — all the saving, the research, the applications — should seem worth it when you leave the attorney’s office with your house keys.
Decide what your first meal in your new home will be. Show the kids or your pets around the place. Introduce yourself to the neighbors. Get settled in.
Take time to enjoy the win because, soon enough, you’ll start to become acquainted with the challenges of homeownership. Of course, there’s the huge mortgage balance to get paid off, so we’ll start our “New Homeowner Frequently Asked Questions” here:
Are There Shortcuts to Paying Off the Mortgage?
Yes! The more you pay on your loan’s principal, the less interest you’ll pay in the long run and the faster you’ll be out of debt. You probably saw a “truth in lending” disclosure at your closing. The form should have shown you exactly how much money you’d spend on the loan if you paid on schedule.
For example: If you have a new, 30-year, $175,000 mortgage loan at 4 percent interest, you’d pay about $125,000 in interest charges over the next three decades. So, you’d actually be paying $300,000 to buy your $175,000 house. It’s annoying, I know, but such is the mortgage lending business. Banks don’t help you buy a house for free.
However, by reducing the length of your loan, you can reduce the amount you pay in interest. How do you reduce the length of your loan? By paying extra on the principal of the loan.
“Principal” refers to the actual balance.
In the example above, the $175,000 would be the principal. For this to work you need to pay your scheduled payment which will automatically include interest charges, then make an additional payment on principal. Your lender’s online payment system should offer a way to designate the extra payment to principal. If it doesn’t call the lender to ask about it. Unless the extra payment gets properly designated, you may be simply paying the next month’s scheduled payment.
What is the effect of paying extra on principal?
On the $175,000, 4 percent, 30-year loan from above, by paying an extra $100 a month you’d save about $25,000 over the life of the loan and have the house paid off five years sooner.
Should I Pay Off the Mortgage Right Away?
Like a lot of great questions, the answer here isn’t as simple as you’d think. Yes, your mortgage is a big debt, and yes, it would be better to own the house outright and cut back on some of those interest charges. But a singular focus on paying off the mortgage can also cost you.
For example, you shouldn’t rack up a bunch of credit card debt because you’re making three house payments a month. Or, some people may benefit from saving for retirement each month instead of paying extra on the house.
Even if you can afford to pay down the mortgage quickly without making sacrifices elsewhere, some tax professionals think you can benefit more by writing off your mortgage interest at tax time, which you can’t do after you’ve paid off the mortgage.
Long story short: There’s no one-size-fits-all answer to this question. Consider your individual circumstances and ask a financial advisor for help.
What is Mortgage Life Insurance?
The emails and postcards may already be flooding in. Since you’ve bought a house, insurance companies will be offering you mortgage insurance which would pay off your loan if you died.
That way your family wouldn’t have to worry about paying off the house or selling it. It sounds like a sensible precaution, but like a lot of unsolicited offers, you can probably do better.
If you’re worried about protecting your investment and your family’s overall financial security if they suddenly did not have your income, you’re not alone. There’s an entire industry set up to address that need. It’s called life insurance. A term life policy may suit your needs better than mortgage life insurance. Mortgage insurance would pay off the balance of your loan if you died. Term life would pay your beneficiary (your spouse, partner, adult child, etc.) if you died. Your beneficiary could then use the money as he or she saw fit rather than having it automatically go to your mortgage lender.
What About Refinancing?
You’ll also get offers to refinance your loan.
When you refinance, you’re getting a new mortgage on the same house. The new mortgage pays off the existing mortgage, then you start over paying off the new loan under its terms.
If you can get significantly better loan terms by refinancing, then go for it. Here are some questions to ask yourself:
Can you lower your interest rate by a couple percentage points? If you’ve resolved some credit issues since buying your home, you may now qualify for a much better interest rate on a refinanced loan. This could save you thousands of dollars.
Can you now afford a significantly higher payment? Maybe you’ve gotten a new job or a big raise and can afford a much higher payment then when you first bought the house. If you’re going from a 30-year to a 12-year mortgage, you can save a lot in interest charges by refinancing. (You can achieve a similar effect by simply paying more on principal each month.)
Are you worried about your variable rate? Did you get a variable rate mortgage and now you’re coming to the end of the introductory rate period? Depending on the climate for interest rates, you may want to lock in a fixed rate by refinancing.
Did you get a subsidized loan and now need more flexibility? Subsidized loans are great, but they can limit how you use your property. If you wanted to turn your home into a rental property, your federal loan may not allow it. Refinancing with a conventional loan can open up more possibilities.
Usually, when you refinance, you need to pay closing costs again. Be sure the new loan will save enough money to justify a second round of closing costs.
What is a Second Mortgage?
To understand how second mortgages work, you need to know about equity. Equity refers to the amount of the house you actually own.If your house is worth $200,000 and you still owe $150,000 to your mortgage lender, you own $50,000 in home equity. You can tap into that $50,000 by getting a second mortgage or a home equity line of credit.
After doing so, you’ll still have your original mortgage to pay and you’ll have a second mortgage to pay each month. A lot of people got into serious financial trouble in the late aughts when the housing market plummeted and their equity, which they’d already borrowed against, vanished. So, don’t overdo it. Save this option for home improvements, even when you’re tempted to pay off credit card debt or a car loan with a second mortgage. By investing your equity back into your home, you can increase the home’s value. But don’t go too far here either. It is possible to invest beyond the value your local market can re-pay.
Your home’s location has a big say in its value. No matter how nice your new appliances and cabinetry may be, your home’s overall value will still be constrained by the local market.
A home equity line of credit works similarly, but rather than having a fixed amount, you can borrow against your equity as needed. Think of it as a cross between a second mortgage and a credit card.
A Big Investment in More Ways than One
When people say your home is your biggest investment, they’re not talking about only money. You’re also investing time, patience, and knowledge. Your knowledge investment can make your financial investment go even further. Knowing how to determine your price range, how to avoid excessive interest charges, and how to interpret a home inspection report, for example, can protect you from costly mistakes.
Knowing how to make an attractive offer and how to back away from a counteroffer will serve you well in your local market. Take your time and learn about the process. Research your loan options, even after you’ve closed on the home. Consider the long- and short-term effects of each option. With the right knowledge, you can do home-buying your way.