Housing is the single largest expenses in any budget after taxes. We often treat the rental payment or mortgage payment as a non-negotiable expense. Unfortunately, mistakes can cost you dearly, and the worst-case scenario is losing your home. Here are a few tips and tools to help you manage your mortgage.
Run the Numbers Before You Act
Don't refinance your mortgage based on the mere belief that refinancing at a lower interest rate is worth it. Run the numbers. Use financial calculators to determine if the fees you pay to refinance your loan will be worth it, if you refinance at today's low interest rate. You may find that it is better to put that 1,000 to 3,000-dollar fee down against the loan principal to be a better investment.
What if you're debating between a larger down payment and a larger home? Again, run the numbers. What will your house payment look like if you buy the more expensive home with a lower down payment? Take the time to look at what you'll pay over the life of the loan instead of simply looking at the monthly payment. (However, the monthly payment needs to be something you can easily afford.)
Run the numbers to find out if a 15 year or 30-year mortgage is better. In general, you'll pay more per month for a 15-year mortgage but less over the life of the loan. Do not take out a 30-year mortgage while promising yourself you'll pay it down. Less than 90 percent of 30-year mortgage holders pay enough toward the loan to pay it off.
Consider the Alternatives
Don't assume that the loan being offered by a lender is the best choice. Shop around, whether you're going to buy your first home or refinance your current mortgage. Your current bank may not be offering you the lowest interest rates or best loan terms. This is especially true if you don't have the best credit. While most loans are either 15 or 30 years, you can research 10, 20- or 25-year loans. It doesn't hurt to ask. Instead of refinancing your mortgage to change the repayment schedule, will they allow you to make the payment in two portions at the first and middle of the month? Instead of refinancing the mortgage to put more money down, can you simply make a large principal payment? Instead of refinancing the mortgage to cash out the equity, would it be more cost-effective to apply for a home equity line of credit? Don't assume that the mortgage product you're being recommended is the best one for you. Use financial calculators and price quotes from a variety of lenders to know for certain.
Know the Total Bill
Too many people buy a house based on a comparison of the mortgage payment versus their current rent. Know the total cost of owning a home before you make a purchase and know that this number will vary from property to property. You control the amount you put down as a down payment. The cost of the home you purchase will determine the percentage down, and that determines whether or not you'll have to pay private mortgage insurance. Plan on spending several thousand dollars in moving expenses, repairs and little fixes that will need to be made. Have this money saved in cash, so that you don't have to borrow against the home equity or your credit cards to pay for it. Expect to spend several thousand dollars a year on repairs and maintenance, though this money may go into a sinking fund to pay for major expenses like repairing a damaged roof or replacing the carpet.
There are other expenses you'll have to pay to own your home, as well. Depending on where you live, you may have to pay homeowner association dues. Homeowners insurance is mandatory if you have a mortgage, though you can choose which riders you'd like to have and the deductible level. If you opt for a higher deductible, increase the amount you put in savings for when the roof is damaged by a hailstorm or the hot water heater breaks and floods your home. Property taxes are mandatory, though the tax rate depends on your jurisdiction. And you might save quite a bit by buying a home in a jurisdiction with a lower tax rate, though you could buy a cheaper property, too.
Have an Emergency Fund
We've already mentioned the value of having a sinking fund for major repairs, so that you don't have to borrow against the home's equity to replace the roof or the floors. We also recommend having a 3 to 6-month emergency fund to cover emergency expenses. For example, this savings account ensures that you can pay the mortgage when you've lost your job. It prevents you from having to choose between paying the rent or paying for critical car repairs, too.
Put Payments on Automatic
You will pay a fee when your house payment is late. You could be hit with late fees if your homeowner's insurance or HOA dues are late, too. The solution is to put these payments on automatic. If your mortgage payment is automatically deducted from your checking account, the mortgage lender may even give you a discount on the interest rate.
However, you need to monitor the account balances, because you'll pay an even greater penalty if the automatic payments bounce. Furthermore, you should pay attention to your subscriptions and automatic payments. If your checking account is getting low, you may need to cancel the optional entertainment services and convenience services to ensure that you can pay the house payment. At least once a month, check the amount you're being billed, too. You may find that your home and auto insurance bill has jumped. Verify that the money put in escrow for your property taxes is being paid to the appropriate authority at the end of the year and is within the expected range. You can't afford to be hit with a bill for unpaid taxes because you didn't put enough in escrow and adding extra money to escrow is a waste.