How much do you think about your mortgage? Probably not much at all.
But financial professionals say that homeowners can save money, lower the amount of interest they pay each year and maybe free up some extra cash, all by tweaking their mortgages, whether they are paying off a conventional loan, FHA mortgage or VA loan.
If you’ve gotten into the habit of ignoring your mortgage, it’s time to take a look at what is probably your biggest financial obligation. Here are three suggestions from mortgage lenders and financial pros to use your mortgage to better your finances in 2017.
Are you paying off a 30-year, fixed-rate mortgage? It might be time to refinance that loan, not for the benefit of lower interest rates but to turn your mortgage into one with a shorter term.
Turning your loan from a 30-year version to a 15-year one will result in a higher monthly mortgage payment. But you’ll also dramatically reduce the amount of interest you’ll have to pay over the life of your loan. Mortgage rates with 15-year, fixed-rate loans are lower than the ones attached to longer-term loans, too.
“Going shorter term is a big financial benefit,” said Jason Zimmer, president of Lockport, Illinois-based Parlay Mortgage. “The 15-year loan is where you want to go. You can save so much money.”
Look at the financial difference: Say you are paying off a 30-year, fixed-rate mortgage of $250,000 at an interest rate of 4.09 percent. Your monthly payment, not including property taxes or insurance, will be about $1,200. But you'll pay a total of $184,000 in interest if you take the entire 30 years to pay off your loan.
But say you now owe $225,000 on that same loan. If you refinance that amount to a 15-year, fixed-rate mortgage with an interest rate of 3.33 percent, your monthly payment, not including taxes and insurance, will jump to just under $1,600. But if you take the full 15 years to pay off this loan, you'll only pay about $61,000 in interest, a huge savings from that 30-year loan.
"Lots of people don't consider a 15-year, fixed-rate mortgage for a refinance because they knew they could not afford one when they bought their house in the first place," said David Reiss, professor of law at Brooklyn Law School in New York City. "But if you have had your house for more than a couple of years, and your income has increased in the interim, refinancing into a 15-year, fixed-rate mortgage can be a great way to get a lower interest rate and pay a lot less interest in the long run."
Remove the PMI
No one enjoys paying private mortgage insurance, also known as PMI. This is a type of insurance that doesn't protect homeowners but actually provides financial protection for your lender, and costs homeowners, depending on the size of their mortgages, about $83 a month on average.
Fortunately, you can ask your lender to remove PMI once you build at least 20 percent equity in your home. And your equity might be higher than you think, depending on how much your home is worth in today’s market.
Equity is the difference between your home's value and what you owe on your home. If your home is worth $200,000 and you owe $170,000 on your mortgage, your equity stands at $30,000.
Crystal Stranger, an accountant and president of 1st Tax in Los Angeles, recommends that homeowners pay for an appraisal -- this can cost about $400 -- of their residences. If their homes have risen enough in value, they might now have enough equity to drop their PMI.
"Since the market has been rising in many places over the last couple of years, this could save you thousands of dollars, just for the cost of an appraisal," Stranger said. "It is worth asking your mortgage company about."
Free up some cash
Are you struggling to pay your bills every month? Maybe your spouse lost a job and your household income has shrunk. Or maybe you’re no longer receiving the steady overtime work you had been landing for months.
You might be able to reduce your monthly debt burden by refinancing to a loan with a longer term.
Say you are paying off a 15-year, fixed-rate mortgage of $200,000 with an interest rate of 3.35 percent. Your monthly payment, not including taxes and insurance, would come out to about $1,400. If you owe $180,000 on that loan and refinance that debt to a 30-year, fixed-rate loan with an interest rate of 4.25 percent, you'd owe only about $885 a month, not including insurance and taxes.
That will free up plenty of cash if you are working through a financial challenge. Just remember, though, that there are some downsides to refinancing to a longer-term loan. You will pay much more interest over the life of your loan. And you will be adding years to your eventual pay-off date.
But if cash flow is your primary need, making this move in 2017 could pay off.
“Paying those extra years is big,” Zimmer said. “But if you need the relief, this is an option.”