You are viewing the printer-friendly version of One Minute Guide to Optimizing Your MortgageOne Minute Guide to Optimizing Your MortgageFor most homeowners, the mortgage payment is by far their largest monthly expense. Spending 60 seconds reviewing it can do wonders for your finances. So, let's take a look...0:60 Are you paying PMI? If the amount you borrowed to pay for your home was more than 80% of the appraised value of your home, you're probably paying PMI (private mortgage insurance). PMI payments are not small, nor are they tax-deductible. They effectively increase your interest rate by 0.32% to 0.93% (hey, that could be $100 a month!) depending on the size of your down payment. 0:50 Say goodbye to PMI You can get rid of PMI by providing your lender with proof that your mortgage balance is less than 80% of your home's value. Do what it takes to get there: Send in extra payments (clearly identified to "apply to principal") to get the mortgage balance down. Or, if housing values are rising in your neighborhood, get a new appraisal. Talk to your lender and see what you need to do to eliminate PMI. 0:45 Can you lower your payments by refinancing? The rule of them is, if you can chop a percentage point off the interest rate on your mortgage, you should consider refinancing. However, that's just a rule of thumb, you'll also need to take closing costs and points into account. Even reducing your mortgage payment by $100 a month can save you thousands over the years. 0:30 Should you prepay? Once you get your loan-to-value low enough to banish PMI, is it worthwhile to keep making additional payments to principal? Owning a home outright can be a huge financial advantage, but there's no rush. In most cases, you will come out on top by sticking to a 30-year payment schedule and investing your extra money in a market-matching index fund. 0:15 Tap into your equity The equity in your home (your home's worth worth minus what you owe) can be a good source of low-interest funds for major purchases. Consider refinancing (a good first choice), a home equity loan (a feasible second choice), or a home equity line of credit (the most flexible, but the one with the highest interest rates) to generate cash if you need to finance home improvements or have other major expense for which you would be taking on debt. Or, if you are carrying a lot of high-interest debt, you can use your equity to reduce the interest you are paying. The interest will be tax-deductible, too. Just don't go overboard. Mortgages are "good" debt, but they are still debt. Don't abuse your equity. Remember, the collateral for these loans is your home. Whew, that wasn't so bad, was it? Whatever time it takes, it's certainly worth getting the most bang for all of your mortgage bucks. aa |