Jun
16

Four Key Questions about Your Home Loan

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The start of summer is nearly here, which means things like baseball, hotdogs, and apple pie are on our minds. But that’s not all the arrival of summer means: 2011 is almost halfway over. That makes now the perfect time of year to make sure your home loan is working for you. Here are four questions you should ask yourself about your mortgage…before the temperatures start turning colder again.

Question 1: How does my interest rate compare to what’s available today? The economic realities of the past few years have taught people some valuable lessons. One of which is: It’s not what you make, it’s what you keep, that counts. Think of it this way: If you discovered that someone was stealing from you, how quickly would you act to stop them from doing it again? Would you act today, in a week, a month, or not at all? The odds are you would act sooner rather than later. So here’s a question for you to consider. Is your current loan stealing money from you? Could you benefit from refinancing and lowering your interest rate and/or monthly payments on your home loan? Let’s look at some numbers: On a $300,000 mortgage, decreasing your interest one percentage point saves you $3,000 in interest a year, or $250 a month. That’s right, $250 a month! Today, many major corporations with millions, and in some cases billions, of dollars are taking advantage of these low rates. Shouldn’t you be, too? Perhaps this is one of those times when following the herd isn’t such a bad idea.

Question 2: Do I have the right loan for my personal situation? Are you one of those people who is planning to stay in your home for the rest of your life? Have you packed and unpacked dozens of boxes, hoping to never hear the whisk of packing tape again? Or, are you excited about downsizing in a few years, once your kids head off to college? Or maybe you’re considering relocating for a career opportunity? Whatever your situation, the key point to remember is that the length of time you are planning to stay in your home is a big factor in determining whether you have the right loan. For example, if you know you are planning to move in five years, a seven-year adjustable rate mortgage may be a great option for you since it typically offers lower rates than a 30 year fixed loan and since you plan to move before the rate adjusts at the seven-year mark. Pay attention and be aware as situations arise in your life. They may just help you save money in both the short and long-term.

Question 3: Is my mortgage well integrated into my financial plan? Before you get excited that you have a low mortgage rate or owe very little to the bank on your mortgage, ask yourself the following questions: Do I maximize contributions to my retirement plan at work? Do I carry balances on high interest non-tax-deductible consumer debt? Do I have a sufficient liquid rainy day fund established? Remember: Your mortgage is just one element of your financial plan. And while securing a low rate or owing little on your mortgage are great achievements, neither will make you financially secure if you don’t also have a plan in place for retirement or have liquid cash on hand to cover an emergency. And, if you’re making large credit card payments every month–paying more in the long-term in interest on these payments than if you were able to use some of your equity to pay off your debt–than your mortgage is standing on its own, instead of helping you increase your overall worth.

Question 4: Should I pre-pay my mortgage? Would you rather be house rich and cash poor? Or house poor and cash rich in this current economic environment? Here’s some information to consider. Home equity accumulates in four ways: the money committed in the original down-payment; any appreciation in the local housing market over time; physical improvements or renovations; and, of course, principal payments on the mortgage itself. While seemingly desirable on its face, this accumulation of wealth in the home has three consequences that you should keep in mind. First, the cash in your home is “buried.” Not only is it unavailable in the event of a family emergency, it is vulnerable to loss due to periodic downturns in housing values, fire, or natural disasters such as hurricanes (insurance, where available, may not cover the full market value of your home). Perhaps more critical, cash trapped in property is earning zero interest, year after year. No prudent consumer would put money into a savings account or investment plan that yields no rate of return, but many homeowners do exactly that without a second thought when it comes to their mortgage.

The Bottom Line Everyone’s situation is different and the only right answer is the one that is right for your situation. If you’d like to see how you can make your mortgage work better for you, please contact me to review your individual circumstances.

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