How to Use Your Mortgage to Achieve Your Financial Goals
Mountain America is an equal opportunity lender.
Buying a house is no small feat—it takes a lot of work! Between making sure your credit score is where it needs to be, spending countless hours finding just the right property, collecting all the required documentation, getting the appraisal and inspections, and saving for a down payment, it’s a wonder anyone makes it through!
After we’ve finalized our mortgage, many of us don’t ever really think about it again—other than paying our payment every month, of course.
Did you know that your house can help you achieve your financial dreams? Whatever your reasons for buying a home in the first place—to accommodate a growing family, to feel safe or as a solid investment—it can also help improve your life in the future.
Refinancing
Just because you qualified for a certain mortgage interest rate when you first got your loan doesn’t mean it has to stay that way until the end of time! For many homeowners, especially first-timers, it was so stressful getting their finances in order and qualifying for a mortgage that, once they are in, they don’t want to revisit this process for a long time!
But, after you’ve paid on your mortgage for 5, 8, 10 years, you may be in a better financial position and wondering if it’s possible to rework your mortgage. Doing this can help you save money, shorten your loan term or better align with your financial goals.
What does it mean to refinance your mortgage?
A mortgage refinance replaces your current mortgage loan with a new one that has more favorable terms. Most people focus on lowering their interest rate. With rates having been low for quite some time, however, you may be satisfied with that percentage. Perhaps you are more concerned with saving in a different way.
There are four main reasons people want to refinance:
-
Get a lower interest rate
-
Shorten their mortgage term
-
Reduce their monthly payment
-
Get money for other expenses
No matter your end goal, do your research to find the right strategy for you. Use a mortgage refinance calculator to model different scenarios. You can also get expert advice by talking with a mortgage professional.
Reduce your interest rate
While you may not be able to get much lower than what you currently have, it’s always worth it to review your mortgage every few years—or, if rates are still low, even every year—to see what you can qualify for.
The general rule of thumb is that you will want to reduce your interest rate by at least 1% for the cost of a mortgage refinance to be worth it.
What do we mean by that? You want to save enough money to cover the costs associated with a new mortgage, like closing costs, application fees and appraisal fees, PLUS reduce how much you’re paying for your home.
Shorten your mortgage term
Say you’ve paid on your mortgage for seven years. You may be able to refinance the remaining balance into a new, shorter-term mortgage while paying roughly the same monthly payment. Or, if you think you could now afford to pay a little bit more, add $100 or $150 more per month and pay your mortgage off even faster.
Think of all the interest you would save if you reduced your payments by a few years! This strategy can work for anyone but is especially useful for people who are thinking ahead to their retirement years.
Reduce your monthly payment
If your goal is to lower your monthly payment, refinancing can help there, too. Let’s take that same scenario of having paid on your mortgage for 8 or 10 years. If you refinanced so that the remaining balance was spread out over 30 years, your monthly payments could possibly be several hundred dollars cheaper!
Get cash out
Refinancing may be an option if you are in need of additional cash. Maybe you need to pay for your daughter’s wedding, make home improvements or pay for medical expenses. In this case, you may choose to refinance the remaining balance on your mortgage PLUS an additional amount. This likely would not reduce your monthly payment or shorten your term, but would give you extra money to use as needed.
To decide if now is the time to refinance and which strategy would work best to achieve your financial goals, be sure to meet with a mortgage professional. At Mountain America Credit Union, we have experts available to guide you through making the best decision for you!
How can a HELOC help?
Another way to make your home work for you is to get a home equity line of credit (HELOC). We talked to Bret Butterfield, vice president of home equity lending at Mountain America, to answer this question and get some insight into how you can make the best choice for your financial situation.
“We, as lenders, will use the equity in your house to determine how much money you qualify for on a home equity loan,” explains Bret. “We help make people’s lives better by helping them improve their home or pay of debt or medical expense.”
What is a HELOC?
To understand a HELOC, you must first understand equity. It’s the equity in your home that determines how large your HELOC could potentially be.
How do you calculate equity? When it comes to home equity, it can be defined as how much market value your home has. A HELOC can provide a certain level of flexibility that isn’t an option in a traditional mortgage. This is one of the first HELOC requirements you should address when making this consideration. You can figure out how much equity you have in your home by subtracting the amount you owe on all loans secured by your house from its appraised value.
For example, if you owe $200,000 on your home and its appraised value is $350,000, your home equity is $150,000. Understanding how much equity you have in your home is the first step to determining your process for obtaining a HELOC.
Learn more about HELOC calculations to help you decide if it’s a good strategy for you.
What is a “line of credit?”
A line of credit is just like a credit limit—like you have on a credit card. Use what you need, up to that limit, and then pay it back. Then, use it again, and pay it back. Your house serves as collateral on the line of credit.
How to use a HELOC?
Two common ways to use a HELOC are for home improvements and debt consolidation.
-
Home improvements—The interest rate on a HELOC is usually lower than most credit cards and you only pay interest on the money you spend. One potential drawback? It can be easy to go overboard—you suddenly have access to a big chunk of money and you may be tempted to spend more than expected. The best way to combat this potential budget-buster is to create a detailed budget and stick to it.
-
Debt consolidation—A HELOC can be a great option if you have multiple credit cards, medical bills or student loans. This strategy can help in several ways—wrangling the pile of bills you have to pay into just one monthly payment, lowering your interest rate or reducing your monthly payment.
What is the difference between a HELOC and a home equity loan?
Both options use the equity in your home. Here’s a clearer picture of the differences:
-
HELOC
-
Variable rate
-
Flexible payment options
-
Longer overall term to pay back—usually 10-year draw period and 10-year payment period
-
-
Home equity loan
-
Usually a fixed rate
-
Set monthly payments over a specific term—similar to a first mortgage
-
When should you use one over the other?
The answer to this question really depends on the particular situation—and the person.
For example, someone who finds it difficult to save and budget may opt for a home equity loan over a HELOC because they don’t trust themselves with all that money sitting in their account. Or they may just prefer to know exactly how much and for how long they will be paying on the loan.
Someone else may prefer the flexible payment options and uses for the money in a HELOC.
If you decide to get a HELOC, make sure you have a payback plan in place. If you secure a HELOC with the idea that you can’t afford to pay it back now but you certainly will be in a better financial situation in 10 years when the payments start, you could be in real trouble if your situation hasn’t improved.
Look at your current finances and see if you can budget a monthly amount to put away, in a separate account. It may be as little as $50 or $100 per month. This will give you a well to draw from when the payments begin and provide a cushion as you adapt your budget to include your new payment once your HELOC matures.
