By Ethan Ewing, president at Bills.com
Recently, we’ve fielded a number of questions regarding home mortgages. They range from those with serious mortgage difficulties to those who are looking to pay off their mortgages early. Since we often touch on the subject of home loans and military specific programs for this column, we have chosen three of the most popular and representative mortgage questions asked of our team and shared the answers here. Hopefully these help you identify sound strategies for your own unique mortgage situation.
Feel free to visit our Ask Bill service to find other questions or to ask your own: www.bills.com/askbill.
1. Should I refinance into a shorter-term mortgage?
Now is a great time to refinance your home mortgage if you have good credit and equity. In most cases, rates remain near all-time lows. However, you should also be prepared for a longer and more rigorous loan process than in the past. But if you can qualify, it is a terrific opportunity to reduce your rate and monthly payments.
For those who can afford a slightly higher monthly payment, a 15 or 20-year mortgage is a good idea. Interest rates are a bit lower than a 30-year loan and you can greatly reduce the total amount of interest you pay over the life of the loan. The amortization schedule for a 15-year loan shows that you pay off principal much more quickly and efficiently with a shorter term loan. It’s the best and fastest way to pay off your home loan. However, make sure that you can comfortably afford the higher payment from a shorter-term loan.
2. Should I put extra money into my mortgage, or is it better to invest it?
This decision comes down to personal preference for most people. An argument can be made for both approaches depending on whether you take comfort and emotional gratification from paying off your home early or whether you feel better about diversifying your assets.
If you have a low monthly payment through a 30-year mortgage and have some extra cash on hand, then putting that extra money into your mortgage is a great way to reduce your principal while retaining the flexibility of lower monthly payments. It can achieve the same results as refinancing into a lower-term loan while allowing you some flexibility. If you are planning to make an extra mortgage payment or two in 2012, it’s best to do that at the beginning of the year to maximize the benefit of reducing your principal and resulting interest payments.
However, many people feel they have already committed a lot to their home and would prefer to diversify their assets. In a strict financial sense, using your extra cash to earn 5+% on an investment vehicle is better than the potential 4% on your mortgage. The flip side of course is that you are putting that money at risk depending on the investment. And it’s never a bad idea to have extra cash available; once you use it to pay down your mortgage, you can only access again thru the sale of your home.
3. What should I do if I owe more on my home than it’s worth?
First, realize you are not alone. There are millions of Americans in this same situation and there are options available to you.
The most basic question you must ask yourself is “do you want to keep the home?” If the answer is yes, then look into the Home Affordability Refinance Program or HARP. This government program was just updated by the Obama administration for the second time to help more people qualify for assistance and to make it easier for lenders to offer to homeowners. If your loan is held by Fannie Mae or Freddie Mac and you meet eligibility guidelines (see here for full details: www.bills.com/harp-mortgage/), then you could realize significant savings on your mortgage.
Even if you do not meet HARP guidelines, you can still find a way to restructure your loan by working directly with your lender. Reach out to them with details of your situation to see if they can help you. Most lenders would prefer to work with a homeowner instead of allowing the loan to default or move into foreclosure.
If you do not want to keep your home, then you should still contact your lender. There are short sale or deed in lieu options that will help you get out from under your mortgage. There will still be some damage to your credit score, but it should be less than if you simply walk away from your home. By returning the property to the bank and eliminating your mortgage, you can find a rental property that fits better within your monthly budget.
Bills.com offers a free money Q&A service to readers called Ask Bill. Anyone can review our database of past questions and answers, or ask a new question of the Bills.com team to get their own custom answer.
