How to Manage Your Mortgage Better
Home ownership is often associated with the American Dream. Yet, not understanding how to properly manage your mortgage can easily turn the American Dream into a nightmare. Fortunately, you can manage your mortgage better by following these 12 tips to success.
1. Stay Within Your Budget
Your mortgage is not the place to go big or go home. Carefully consider your budget for purchasing a home, and think about how the mortgage cost may evolve with time. For example, mortgages with a variable rate may result in higher monthly payments when interest rates rise.
2. Negotiate on All Terms
When applying for or refinancing a mortgage, take control of the situation by negotiating on all terms. This is the one opportunity you have to make your voice heard, and you need to leverage your buying power against your lender or servicer. If something does not meet your standards, ask for explanation or changes. While it can be intimidating, the worst scenario is simply receiving a no as the answer.
3. Take Steps to Avoid “Forgetting” to Send in the Mortgage Payment
Life is chaotic, and there will be times when you forget to send in your mortgage payments. Rather than setting yourself for default, create a backup plan to ensure your monthly payment is sent in on time. This may include using automatic bank drafts or bill-pay services. Ideally, try to budget your monthly payment at least one week before the due date. This will help to reduce any potential late payment fees or issues if the payment takes longer to process than expected.
4. Create a Rainy-Day Fund
Financial advisers continually talk about the importance of creating a rainy-day fund, but having a rainy-day fund is not enough to protect you. Account for the cost of making monthly payments on your mortgage plus 10 percent in creating your rainy-day fund. An additional 10 percent is essential to safeguarding against increases in your mortgage payments when you have a variable interest rate.
5. Pay Extra on Your Mortgage When Possible
Paying extra on your mortgage can help to lower your principle and reduce the amount of money paid in interest. However, paying extra on a mortgage does not mean putting all extra funds toward a mortgage. Instead, set aside at least 15 percent of extra funds for retirement or other savings accounts. Any extra money you have afterward can be applied to your mortgage balance.
6. Never Refinance to Pay for Unnecessary Repairs or Expenses
Change is part of life, but unnecessary repairs or expenses should never be included as reasons to refinance your home. If the repair or expense is necessary, refinancing it is an option. For example, a broken deteriorating foundation is a qualifying reason for refinancing, but the changing windows to suit personal preferences is not.
7. Take Time When Refinancing Your Mortgage
If you decide to refinance your mortgage, do not get in a hurry. The lenders are going to be there to help you through the process regardless of how quickly you act. Take time to consider any and all alternatives to refinancing your mortgage, and review how refinancing can save you money. Moreover, shop around for the best rates and terms of refinancing your mortgage. A few extra time planning what you will borrow can save you thousands.
8. Think About Your Taxes
Property taxes are going to continue to increase. You need to factor in how your property taxes will affect your ability to pay your monthly mortgage. Visit your local appraisal district, and look into the average valuation of homes in your area. In addition, look for trends in how quickly the valuation rose. This will help you determine how much you need to set aside or prepare to pay in the future, which reduces your likelihood of dealing with levies or penalties against your property.
9. Keep Your Insurance in Good Standing
Your home insurance is like a second safety net for you and your family, and the overwhelming majority of lenders will require insurance coverage in order to continue carrying the note. If your insurance lapses, the lender or servicer may impose force-placed insurance protection, which is to your monthly mortgage payment. In addition, force-placed coverage is often much more expensive than carrying your own policy. As a result, consider applying the safety measures in Step 3 to your insurance payments.
10. Watch for Mortgage Scams
Even the most cautious buyers can be susceptible to mortgage scams. Once you send the money or personal information off, you could be setting yourself up for identity theft, fraud and lost investments. Always research any mortgage offers thoroughly before accepting or signing any sort of paperwork. Look for inconsistencies, and never jump on an unusual offer within 60 days of first hearing about it. This will give you time to do the research too.
11. Stay in Contact with Your Bank or Lender
While talking with the bank or lender may be last on your list of favorite things, your bank or lender is actually your biggest proponent. Stay in contact with your bank to build rapport, which can actually help you when applying for refinancing or other needs. Furthermore, this will help you avoid the pitfalls of miscommunication between lender and borrower.
12. Ask for Help When Struggling to Make Mortgage Payments
Sometimes, making your monthly mortgage payments may not be an option. You could lose your source of income, or another major life event could decimate your rainy-day fund. However, giving up is not your only option. The FDIC and HUD offer a variety of programs and tools, such as the Home Affordable Modification Program and the Foreclosure Prevention Tool Kit, to borrowers experiencing financial problems.
It is your duty to prevent problems from arising due to your mortgage. Remember your needs, and set realistic expectations when dealing with the ins and outs of your mortgage. But, it is always good to stack the deck in your favor by simply knowing what steps can help you manage your mortgage better.*
*This article provides broad and general guidelines and does not constitute professional financial or legal advice. You should not use this article as a substitute for your own judgment, and you should consult professional advisers before making any tax, legal, financial planning or investment decisions.