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MANAGING YOUR MORTGAGE
If you are approaching or already in your 'golden years',
rebalancing the savings you have for retirement should be simple,
hopefully.... However, your personal assets are not the only piece
of your balance sheet that requires attention.
Size by itself demands attention: On average, American homeowners
own around $120,000. Refinancing mortgages for a lower interest
rate should not even be considered being that rates are well off
their lows. However, other strategies, like maintaining low fees to
utilizing your loan for other purposes, can be a smart move at
anytime.
Refinancing an expensive home equity line of credit
HELOC's were the heroine of the
home-improvement spree of the past
several years, and it's simple to understand why.
Four years ago, the minimum monthly payment on a $50,000 line of
credit was just $165. However, prime interest rate (the rate most
HELOCs are attached to) has doubled to 8 percent, making the minimum
is $330.
If you are having problems paying off your
HELOC, you probably
should look into converting it to a conventional loan.
Another option would be
refinancing it and your mortgage into one
single loan that is at a
fixed rate -- that is only if your can
locate a rate that is better than what you are currently paying for
both loans and saves you enough money to cover the
cost of
refinancing.
You will need to determine your blended interest rate by diving your
mortgage balance by total debt (mortgage balance plus line of credit
balance) and multiply that by your mortgage rate. Then divide your
HELOC balance by total debt and multiply by your HELOC rate. The
resulting sum of these two is your blended rate. Check out the
mortgage calculator to help determine whether the ARM loan is
better than a fixed rate.
Suppose you have a $200,000 balance on your mortgage with an
interest rate of 6.5% and a $100,000 balance on a HELOC with a 10.5%
rate. Your blended rate is 7.8% - a rate you can still beat today.
Cancelling PMI
The current price of homes has been increasing at a steady
rate...making it hard for buyers to put together enough money for a
respectable down payment.
If you leave less than 20%, you will probably be paying
PMI,
otherwise known as private mortgage insurance. PMI will result
in you having to pay an additional $16-50 month for every $100,000
worth of debt. So, if you have a $500,000 mortgage and the cost of
PMI is $30/$100,000, then you must pay an additional $150/The extra
cost - $16 to $50 a month for every $100,000 of debt. This amount
may seem insignificant that you overlook payments, but it does add
up over time.
If you applied for a mortgage after July 1998, your lender is
required to automatically terminate your PMI as soon as you have
paid off 22% of your loan. However, you can request that your PMI be
discontinues once you have accomplished 20% worth of equity. Learn
more about
building equity.
This is when price increases are beneficial: you will likely reach
the 20% mark sooner than you anticipated if prices in your
housing market
have increased notably. It is important to understand that all that
gain belongs to you, not the lender.
The only downside is that you will have to shell-out around $400 for
an appraisal to confirm that your principal payments and gains are
equal to at least 20%. However, a few months of PMI savings should
satisfy that cost.
Prepaying your mortgage
Paying off your mortgage will likely result in a strong sense of
freedom. However, that does not necessarily mean that it is a smart
move financially.
Prepaying mortgages is efficiently the same as gaining a return
equal to the interest rate on the loan. However, as a result of
recent low mortgage interest rates - you could be paying less than
6% on a 30-year loan - don't exceed what stocks have traditionally
returned.
A smarter move for those lacking retirement funds is to use the
equity from their home and take on more debt. If you anticipate
selling your house when you retire, you can
apply for a cash-out
refinance loan and invest the money.
This is a very wise move if you have benefited large gains in your
home's worth and can put that money to work successfully.
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