So you have finally found and purchased your home! Your little slice of the American dream! Congratulations! The hardest step is behind you. In your upcoming years you will probably purchase 3 to 5 homes, and refinance each several times. Welcome to the world of being a land owner! It is the basis of your financial pyramid and future security. Treat it well.
This article will cover some of the areas you will want to pay attention to now to maximize and protect your investment.
My mortgage has been sold! What happened? This frequently happens. Lenders have a limited amount of money to lend out so they do a loan and then package it together with many other loans and sell the package off to huge institutional investors known as the “secondary mortgage market. " This replenishes funds so the lender can lend out and make more loans. At closing the lender was required to inform you of plans to sell your loan. The rate and terms will not change, just who you make your monthly payment checks out to. You may pay the lender directly or make payments to a mortgage servicing company that collects payments on behalf of lenders. They will also pay your property tax and homeowners insurance from escrow for you, if you do escrow those payments.
They will provide you with a convenient annual statement that shows how much you paid that year, and of that sum, how much went to pay down loan balance “principle" and how much went to pay interest. Mortgage interest on your primary residence is tax deductible for income tax purposes so this is a good figure to have provided to you every year. In addition, if you start to have trouble making your payments, the servicing company can advise and guide you in options. Make sure that when your mortgage is sold or your servicer changes, your new payment books are correct and all terms the same. You do have a right to make written disputes if you think an error has occurred or a payment not been applied.
My monthly payment has changed! What is going on? If you signed up for an Adjustable Rate Mortgage (ARM) you can certainly expect changes at set intervals as spelled out in the terms of the loan. ARM's are covered at great length in some other articles I have written. But what if you have a fixed-rate mortgage and now the payment has increased? Don't worry, it is not a change to the loan's rate or term. The increase reflects and increase in property taxes or homeowners insurance, that is all. Rates for taxes and insurance do change. And as your property increases in value so will the taxes and cost to insure it! If you are escrowing 1/12th of these payments every month as part of your monthly mortgage PITI payment (Principle, INterest, Taxes & Insurance) then the portion of the payment for taxes or insurance that increased will reflect in a higher overall monthly payment. Once your loan to value ratio falls below 78% or after 5 years of making on time payments, if you had mortgage insurance, you are probably eligible to drop this coverage and save money there as well.
What about pre-paying ahead on my loan and making double payments? This can be a great way to get your loan paid off early and save many thousands of dollars in interest. First, though, double-check that your loan does not have a pre-payment penalty. Some loans do carry a pre-payment penalty if you refinance or sell within the first few years, but may not necessarily also prohibit you from making double or extra mortgage payments during those years. Things to consider include the loss of tax-deductible mortgage interest, could you invest those funds elsewhere and get a better return and are you sure you will not need that cash liquid for an emergency or tight spot down the road? Consult a mortgage or financial planner and your tax advisor.
Building equity: Property values do fluctuate but over time, real estate has generally gone up in value. The longer you own your property, the more it will be worth, and at the same time the more of it you actually own, not the bank, as you continue to pay down the loan(s). So equity naturally builds. If you make improvements to the property such as adding rooms, putting in new kitchens and baths, garages, pools, etc. , this also increases property value. You may periodically wish to have a new appraisal performed or at least do some research yourself on what similar homes in your neighborhood have recently sold for.
Refinancing - The Big ‘R’ ! A time may come when you think it would be better to get a new loan. Perhaps interest rates have been dropping and a new loan would lower your monthly payments. Perhaps you have an adjustable-rate mortgage and it has re-set and the payments have gone up and you want to get out of it and into a new loan. Or perhaps you are now ready to pull some equity out of your home for other purposes, such as paying off auto loans, student loans, credit cards and other “consumer debt" the interest on which is higher than interest would be on a new loan against your property, and consumer debt interest is NOT tax deductible, so converting that type of debt into a new mortgage loan can be smart financial planning.
If you have been fortunate to have worked with a good mortgage planner when you first purchased your home, they have surely been keeping you informed as to interest rate trends and probably meet with you annually to review your total financial picture just to take notice of high consumer debt or assess your other financial goals. All of this is called “equity management" and is part of what a Certified Mortgage Planner does for you as a client for life. Perhaps you are ready to buy a second home or an investment property or want to start a business, set up college tuition plans for children or fund retirement instruments. Your home is the basis of your financial pyramid and can, with proper guidance, be utilized for all these goals!
FORECLOSURE!! No one wants to lose their home! Sometimes, though, situations happen. You lose your job or become medically unable to work. Divorce. Lawsuits. Maybe the property value has dropped and the house is now worth less than what you owe. Maybe your ARM has re-set up so high you cannot pay it. Don't panic.
First, understand that your lender does not want the loan to go into default. On the average, a foreclosure costs a lender $50,000 or more in lost interest, not to mention their cost in maintaining an empty house until it sells.
Communicate, do not hide from the problem. A lender will help you look at available options. Perhaps they can waive late fees. Maybe change the interest rate or lengthen the term. At worst, they may even reduce the principle owed. I have several other articles that cover - in depth - foreclosure strategies. For purposes of this article, in general, just realize that, varying from state to state, you may have as little as 90 days or as long as a year before you can be removed from your home in foreclosure eviction.
I do caution you NOT to utilize the services of companies billing themselves as foreclosure specialists, and this includes some attorneys. The bottom line is, if you do not pay, eventually your lender can and will take your property from you. No company or attorney can force the lender not to do so. The entire premise of a mortgage is “a loan secured by real estate" and recorded as a lien in the county courthouse. The lender does have right of repossession. Your responsibility is to talk to your lender or mortgage servicing company and try to work something out before that happens, not try to prevent the lender from exercising their legal rights. This is not a time to dodge or hide or get cute. Money you pay to these foreclosure companies could just as well have gone to the lender and probably stopped the foreclosure. It certainly would have made an impression of good intention on your part!
I recommend you have a good team on your side as your financial base begins to grow. A Certified Mortgage Planner, a tax advisor/financial planner, an attorney and a good Realtor can all be invaluable resources to help you maximize your investment and utilize your home and future real estate investments to achieve your financial goals!
James Hussher is a Certified Mortgage Planner and licensed in all 50 states. Please visit James at http://ezmortgages123.com for all of your residential and commercial mortgage needs. Apply online, check current offered rates and loan programs and more! Many free articles and educational resources may be accessed at http://swifthussherrealestate.com which James also runs!