It’s Time To Put Your Fiscal House In Order

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When discussing personal investments, stocks, bonds and 401(k)s come to mind. It’s true—these are definitely considered investments, but the largest investment that an American family has tends to be their home. The difference between your home’s current value and the balance of any liens against it represents your home’s equity. It is this equity that can be borrowed against or accumulated by either paying down the liens/loans or enjoying the appreciation that homes have traditionally experienced over the long run.

 
The equity in a home is not liquid like money in a savings account, as it is more difficult to access and sometimes requires the sale of the home to access all of it. While selling a home to acquire its equity might sound extreme, under some circumstances, such as the onset of retirement and downsizing to a home that can be bought outright, it may be an appealing idea.
 
The ability to own a home outright also can be accelerated by applying a little extra toward the principal with each mortgage payment. A good way to do this is to round the mortgage payment to a higher number, so if your mortgage is $1,267, you pay $1,300. This extra thirty-three dollars a month can result in significant savings over the term of the loan through the reduction in compounding interest. Be sure to check your monthly statements, however, to confirm that the extra payments are being applied to principal and not simply being credited to the escrow account.
 
It is important to know the terms of your mortgage including the interest rate, current balance and estimated maturity date. Understanding these terms allows homeowners to keep their eyes out for the potential to refinance. Lenders today have tougher loan-to-value requirements than in the past and this criteria has been the largest hurdle to refinancing.  If the current value of the home meets the loan-to-value requirements then serious thought should be given to the savings that today’s low interest rates are mostly likely to create over the original mortgage rate. Even with closing costs factored in, it is possible to refinance at a lower interest rate and receive a lower monthly payment or the same monthly payment but a closer maturity date. 
 
Trying to refinance and then finding out that your credit score is undesirable will halt the process or lead to higher interest rates. Checking personal credit scores and histories are something that should be done even if applying for a loan is not on the horizon. Clearing up incorrect information or correcting poor credit takes time but starting as early as possible leads to a quicker resolution and better credit score. The three credit reporting agencies are Trans Union, Experian and Equifax. Congress has mandated that individuals be allowed a free copy of their credit report, but not their credit score, from each agency once every 365 days, www.annualcreditreport.com. Be wary of other sites that claim to give free credit reports and scores as their fine print usually requires a subscription to a paid service that they will waive for the first month or two but later will show up on a credit card statement and may go unnoticed for months.
 
In addition to principal and interest, a mortgage payment usually consists of escrowed items such as home insurance premiums, private mortgage insurance premiums and real estate taxes. It is a good idea to review these amounts to determine if there is any saving potential.
 
Shop around for home insurance once a year or two to be sure that the rate being paid is competitive and if it is not, consider switching home insurers. Private mortgage insurance (PMI) is usually required on loans that were originated with greater than 80 percent loan to value. This monthly payment can be cancelled once a homeowner has paid the loan down more than 20 percent or when the home has appreciated to the point where the loan represents less than 80 percent of the current home’s value. 
 
The lender will require an appraisal paid by the homeowner to confirm the home’s current value, but the savings can be recouped in a few months. Real estate taxes are assessed on the home’s value at a set rate determined by the home’s locality. While the rate is not negotiable, the home’s value is and can be done during the assessment period. The locality will notify the homeowner of the assessed value and instructions on how to appeal if the homeowner does not agree. This requires that the homeowner make the case that their home is being over valued and to cite facts in support of their claim. 
 
Mortgage payments tend to be a family’s largest monthly expense but they should also be looked at as an investment. It’s important to take an active role in the management of your home investment as a little bit of savings in this category really adds up. So when considering your portfolio of personal investments, be sure to include your home in the mix as it properly belongs there. 

 

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