Your loan term might be fixed, but it doesn’t have to dictate when you’ll be mortgage-free. Find out how to speed up the process.
A lot can happen in 30 years. Kids become adults, jobs change, and life goals are accomplished and reset. Change during such a lengthy period is inevitable. But if you’re a homeowner, there’s one thing that won’t change: Your obligation to make a monthly mortgage payment.
The good news? A loan term doesn’t have to dictate when you free yourself from this financial commitment. There are a few tried-and-true ways to cut the ties early while lowering the total amount paid in the process. Follow these recommendations, including the No. 1 tip to pay off your mortgage early on your home, whether it’s in Seattle, WA, or Boston, MA.
5. Refinance into a 15-year mortgage
Cutting your loan term in half is a big financial step, but the benefits are substantial. Not only will you shorten the payoff time, but you’ll also be rewarded with a lower rate and pay significantly less in interest over the life of the loan.
The key here is determining whether you can shoulder the larger monthly cost that comes with a 15-year mortgage. Pamela Capalad, CFP and founder of Brunch and Budget, explains, “The downside is, you’ve locked in a much higher monthly payment. Make sure you have the cash flow to afford this new monthly payment on a regular basis.”
Not completely confident in your ability to commit to a higher monthly payment? Fake a 15-year mortgage by challenging yourself to make the payments you would be making if you had locked into a 15-year mortgage. Then, if financial circumstances change, you still have the flexibility to return to a lower monthly payment.
4. Refinance into a lower rate but keep payments the same
The benefits of refinancing your loan but sticking to the same payments are twofold: You will pay less in interest over the life of the loan and create a shorter path to mortgage freedom. Plus, it’s not as drastic as jumping from a 30-year mortgage to a 15-year mortgage.
However, it’s important to do a bit of research before you refinance. Closing costs for refinancing are generally lower than if you were to purchase a new home, but they’re still an added expense. Your new interest rate should be low enough to negate the cost of refinancing, or you should be planning on staying put long enough to reap the benefits of a smaller rate. (Use the Trulia refinance calculator to see if this is a good choice for you.)
3. Get rid of private mortgage insurance (PMI)
If you financed more than 80% of your conventional mortgage, chances are, you are paying private mortgage insurance to protect the lender in case of default. Redirecting this amount — usually 0.05%–1% of the loan amount annually — to the principal on your mortgage can have a big impact over time.
You can request to get rid of PMI once you reach an 80% loan-to-value ratio, but the lender is required to remove it after you’ve reached a 78% loan-to-value ratio. You can speed up the process by increasing your equity through home upgrades, or, if the home has already increased in value for other reasons, you can opt to refinance. Some lenders may even allow you to get an appraisal to show the new value and your increased equity — without paying for a refinance.
2. Put those windfalls to work
Maybe your monthly budget doesn’t have wiggle room and paying the costs to refinance isn’t in the cards. There’s another option.
Tax returns, bonus checks, and inheritance payments present the opportunity to pay off a chunk of your mortgage without feeling the pain in your monthly budget. This could mean thousands of additional dollars chipping away at this massive financial responsibility each year. Sometimes your money could be better spent elsewhere — like paying off high-interest debt — but if wiping out your mortgage early is a priority, this is a great place to start.
1. Make extra or higher principal payments
Jennifer Harper, CFP and director of Bridge Financial Planning, says one small change can make a world of difference. “Even small [additional] principal payments add up over time! On a $150,000 loan for 30 years at 3.75%, with no additional payments, more than $100,000 will be paid in interest over the course of the loan. By adding just $100 per month in principal payments, the total interest paid is reduced by nearly $25,000 and the loan will be paid off more than six years sooner!”
Another way to do this is by making biweekly mortgage payments. Instead of making 12 monthly payments, this equals out to 26 half-payments — or 13 full payments — per year. But beware, explains Harper, not all loan servicers make it easy to apply these extra payments to the principal. Make sure to speak to yours and ensure they aren’t simply holding on to the extra money and applying it toward the interest.
The bottom line: Choose what works for you
Which method should you choose to pay down your mortgage faster? That depends, explains Pamela Capalad.
“Choose the option that resonates the most with you based on your current financial situation and any possible changes you foresee. If you have a steady job or career that you feel confident will last in the long term, it might make sense to refinance to a shorter term. If your income is a bit less consistent, you may want the flexibility of making additional payments when you can.”
If you’ve served in the U.S. military, you can get a loan backed by the U.S. Department of Veterans Affairs with no down payment.
As the financial crisis gets further behind us, mortgage options get more flexible. One loan program that’s often overlooked is a VA loan. If you’ve served in the U.S. military, you can get a loan backed by the U.S. Department of Veterans Affairs (VA) with no down payment.
VA loan features
This may be a surprise: VA loans aren’t actually made by the VA. They are made by mortgage lenders, and the VA backs the loans, which enables lenders to be more flexible when making these loans.
Features of VA mortgages include:
Financing for up to 100 percent of a home’s value. The national loan limit is $417,000, but can go up to $1,000,000 in high-cost areas. VA loan limits for your area are available on the VA site, and a VA lender can also give you local VA loan limits.
The ability to finance most of your closing costs, including appraisal, credit report, title insurance, lender origination fee, recording fees, and survey fees. These represent the bulk of the closing costs in most home purchase transactions.
The ability to finance the one-time VA funding fee that’s required on all VA loans, and the ability to have this fee waived for certain circumstances, such as injury and disability.
No mortgage insurance. This is a material benefit that will save hundreds of dollars per month compared to other government-backed programs like FHA loans, which come with high mortgage insurance fees.
No prepayment penalty if you pay off the loan early.
You will, however, need to provide your lender with a Certificate of Eligibility (COE) to verify that you’re eligible for a VA loan. The COEs for each category of eligible VA borrower have different requirements.
An expert VA lender can also help you obtain the correct COE based on your circumstances. If you fall into one of the eligible categories but don’t know how to get your COE, ask a lender to help you.
The VA loan approval process
Getting your VA loan approved is mostly the same as getting a non-VA loan approved. A lender will calculate your total proposed monthly housing cost plus all other monthly debt — like payments on credit cards, cars, and student loans — and compare it to your income. They’ll want to see that these total monthly costs don’t exceed 43 percent of your monthly income — although in certain cases, the automated loan underwriting engines lenders are required to use for VA loans might allow monthly costs to go as high as 50 percent of income.
Lenders will also look at your credit scores. Each lender will vary in terms of the credit score they require, but generally a score of 620 or better is required to qualify for a VA loan.
If you’re buying a condo, the VA must approve the condo project. The agency maintains a database of pre-approved condos, and if the condo you want isn’t on this list, you’ll need to work with your lender to get the condo approved.
This can add considerable time to the transaction, so make sure you do this research before writing an offer. And make sure your real estate agent is aware you’re getting a VA loan.
In the long home-buying journey, lenders are often pegged as the bad guy—the villain who holds the purse strings and decides whether (or not) to loosen ’em up and grant you a mortgage.
OK. Let’s take a step back. This bad rep is mostly a bad rap. Because the reality is that lenders make homeownership possible for the majority of Americans who do not have the ready cash to buy a home. And even if you’re a less-than-ideal home buyer, because of bad credit or lack of a down payment, they can actually help your loan go through.
Here are five ways lenders can assist you on the path to homeownership, and some recommendations as to how you can make the most of this relationship.
1. Lenders can get you pre-approved
If you know you’re ready to buy—before you’ve even seen the inside of a single house—it’s wise to head to a lender to get pre-approved for a mortgage, pronto. This means lenders check your financial history and determine how much money they’re willing to loan you to buy a home. “You want to apply before you’re entirely under the gun,” says Steven Bogan, regional managing director for Glendenning Mortgage Corporationin Haddonfield, NJ. “If you wait until you’ve made an offer on a house, you could run into problems.”
Pre-approval is proof to home sellers—and yourself!—that you won’t have problems getting the loan you need, once that special house comes your way. It is best to seek a pre-approval at least a month or two in advance, Bogan says. Requirements for approval in a post-housing bubble world can create headaches even for stellar borrowers.
But don’t start too early. Pre-approvals are only good for 30 to 60 days, so make sure you’re really ready to hit the pavement and start looking for houses. Still, don’t stress if your pre-approval expires; getting it re-upped isn’t a big deal.
“We usually just need to run your credit again, maybe get an updated pay stub or bank statement, and you’re good to go,” says Bogan.
2. If you can’t get pre-approved, lenders can show you how
So what if you apply for pre-approval and get denied? It hurts, but don’t worry—the pre-approval process isn’t a one-shot deal. Most lenders will be happy to work with you, even if you aren’t pre-approved right off the bat.
“The majority of lenders will give buyers a step-by-step path they need to follow to get up to approval,” says Bogan. And that usually involves boosting your credit score (more on that next).
3. Lenders can help you boost your credit score
One of the most common reasons home buyers don’t get approval is a lousy credit score—the all-important numerical summary of how reliable they’ve been paying off debts, from credit cards to college loans. You want a simple equation? The lower your score, the less likely you are to get a loan. The good news is that you can take action to boost your credit score. A credit repair company will show you the ropes, but will charge for those services.
You’ve actually got a free credit-boosting guide at your disposal: the lenders who just passed you up for a loan. In most cases, they’ll be happy to show you what you need to do to boost your credit score. And while it usually takes a few months for the credit bureaus to record these changes, lenders have another ace up their sleeve: They can do a “rapid re-score” that corrects and updates info on your credit report in a matter of days.
4. Lenders can help atypical borrowers
Many home buyers are employed, earning a regular W-2 income—a generally safe bet for lenders. But If you’re self-employed, a contractor or running your own business, and your income is more prone to valleys and peaks, a good relationship with a lender can help you cut past reservations about your loanworthiness. “Basically, we’re just going to look at the last two years of tax returns, instead of W-2’s and pay stubs,” says Bogan.
However, Bogan does recommend applying even earlier if you’re a non-W-2 wage earner, since there is more paperwork and more of an investigative process into your earnings. And unlike everyone else, you’ll need to consider your timing. “Say, for example, 2016 tax returns are almost due, and it was a great year incomewise. It would probably be in your advantage to wait until after you’ve filed your taxes to apply for a mortgage,” Bogan says.
No matter what your situation, though, to get the best help, you’re actually going to have to call. “You absolutely want to talk with somebody in person,” says Bogan. So skip the online forms, and ask your friends and family (or your Realtor®, if you have one already) to recommend someone you can sit down with to get the process rolling.
There are many potential homebuyers, and even sellers, who believe that you need at least a 20% down payment in order to buy a home, or move on to their next home. Time after time, we have dispelled this myth by showing that there are many loan programs that allow you to put down as little as 3% (or 0% with a VA loan).
If you have saved up your down payment and are ready to start your home search, one other piece of the puzzle is to make sure that you have saved enough for your closing costs.
“Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage. These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. Closing costs are typically between 2 and 5% of your purchase price.”
We’ve recently heard from many first-time homebuyers that they wished that someone had let them know that closing costs could be so high. If you think about it, with a low down payment program, your closing costs could equal the amount that you saved for your down payment.
Here is a list of just some of the fees/costs that may be included in your closing costs, depending on where the home you wish to purchase is located:
Government recording costs
Credit report fees
Lender origination fees
Title services (insurance, search fees)
Tax service fees
Is there any way to avoid paying closing costs?
Work with your lender and real estate agent to see if there are any ways to decrease or defer your closing costs. There are no-closing mortgages available, but they end up costing you more in the end with a higher interest rate, or by wrapping the closing costs into the total cost of the mortgage (meaning you’ll end up paying interest on your closing costs).
Home buyers can also negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees in order to get the deal finalized.
Speak with your lender and agent early and often to determine how much you’ll be responsible for at closing. Finding out you’ll need to come up with thousands of dollars right before closing is not a surprise anyone is ever looking forward to.
Consolidating debt is about more than combining your current debts into one loan — you’ll have to step back and change your financial habits in order to be successful.
Debt consolidation can look like a great fix for your financial woes, but it may not be the solution you really need.
Debt consolidation is the process of refinancing multiple balances into a single loan. You can take out one loan for the total amount of your current debt, then repay your existing debts with the funds from the new loan. Finally, you’re left with just the new loan to repay.
A debt consolidation loan can help make life a bit easier, reducing the amount of loans and debts you need to track. Making a single payment each month may even save you money in the long run if you can get a lower interest rate than your existing loan rates, and it can help you avoid sweeping a few bills under the rug (raise your hand if you’re renting in Boston, MA, or another pricey market and have felt the burden of a hefty rent in addition to student and car loans).
However, these benefits aren’t guaranteed, and what you save on your interest rate may be canceled out by origination fees and other charges. Consider these factors and be prepared to change the way you spend money before you consider a debt consolidation loan.
Debt consolidation won’t necessarily make things easier
The idea behind debt consolidation is a good one. You get to roll all your debt into one loan to focus on and repay. It makes your financial life simpler and may help you pay less on what you owe if you can get a lower interest rate.
But it doesn’t always work out this way. “I’ve worked with plenty of people pre- and postbankruptcy over the years,” says Jason Reiman, a certified financial planner. He’s the founder of Get Financially Fit!, a company based in Tucson, AZ, that helps people with their finances. “A leading indicator of bankruptcy, in my experience, is debt consolidation.”
Reiman says that consolidating loans (with the exception of student loans) usually provides you with a short reprieve. It’s often followed by taking on new debts outside of the ones you’ve already consolidated. Why do people do this? “Debt consolidation typically doesn’t produce the expected results simply because of mindset,” Reiman says. “As humans, we resist change and discomfort.”
And changing your financial habits to not rack up more debt after consolidation can be really uncomfortable. You must change how you behave with your finances, and that could mean going without the luxuries and the standard of living that caused you to get into debt in the first place.
Be prepared to learn and understand how you spend money
“Debt consolidation can look OK mathematically, but it has a tendency to ignore the emotional and psychological aspects,” Reiman says. And those factors do matter as much as — or more than — the numbers.
Your mindset and behavior are at the heart of any financial issue. While a debt consolidation loan can help some people, it won’t do anything for you if you’re not committed to changing your internal thought processes and switching up your spending patterns.
Reiman says that for any solution to be effective, you need to start with the real cause of the problem. Ask yourself a few important questions. “For example,” he suggests, “how did I get into this heavy debt situation in the first place?”
So if debt consolidation isn’t the answer for you because it doesn’t address the root of your financial troubles, what is the solution? Reiman offers one exercise to try. “Get out a piece of paper and a pen,” he says. “Divide the paper into four quadrants: physical, spiritual, mental, and financial. Jot down your thoughts and actions over the past three to five years which may have prompted you to add more debt to your life.” Reiman says we will remember times when things seemed to happen outside of our control. But by taking a look at how we thought and felt at that time, we can see patterns in how we acted and reacted.
“The purpose of this exercise is to help uncover the counterproductive actions,” he explains. “Only when you know how you arrived at your current situation are you able to make solid choices about changing it for the better.”
Clean up your finances before consolidating
If you feel that a debt consolidation loan is an important step in your journey to financial success, make sure you do everything you can to eliminate opportunities to create new debts in the future. Cut up your highest-interest credit cards and use a budgeting system you can stick to. Start building an emergency fund or a savings account with a cash reserve you can draw on if something comes up that your monthly budget can’t handle.
Then sit down and make a plan for how you’ll repay your consolidated loan. Will you cut back on your spending to help make those payments and avoid further debts? Will you work to earn more so you have more cash flow to put toward debt repayment?
Consider other options
Remember, a debt consolidation loan is only one strategy for repaying what you owe. “The process of eliminating small debts one by one, and achieving these small wins, is invaluable,” Reiman says. And he stresses the importance of simply having a plan and tracking your progress.
“If you have multiple debt accounts, consider using a free program like powerpay.org to crunch the numbers,” he says. The site will help you craft a plan of action that most likely doesn’t include consolidation. You can also use various debt payoff strategies, like the debt avalanche or debt snowball, to help you make progress.
“Get accountability and coaching and be open to change,” Reiman says. “It’s difficult but possible.” Your current level of debt might seem insurmountable, but don’t get overwhelmed. Take a deep breath, consider your options, and make a plan. Then dive in!
Different types of debt can boost your credit score — but overborrowing can hurt you.
When you’re shopping for a mortgage, your credit score is a really big deal; it can make or break your mortgage approval and ultimately determine whether you get that home for sale in Boca Raton, FL. But before you analyze your credit score, it’s important to look at how your existing debt affects that score.
Debt comes in two types: secured and unsecured. When you borrow money to buy a house, the bank can take back the house to recoup its money if you don’t pay the debt. That means the debt is secured — it’s balanced against something you want to keep and gives the bank some measure of security that it can recover the money it lent you. Unsecured debt, on the other hand, means the bank can’t reclaim what you’re buying with the borrowed money. (Credit card debt and student loans are unsecured.)
The following four key consumer loans affect your mortgage worthiness in different ways. Read on to find out what steps you can take to improve your credit if you have these loans (or are considering them), so you can qualify for the best mortgage rates out there.
1. Student loans
Student loans are unsecured debt, but they’re not necessarily bad for your credit score if you pay your bills on time. Because they often take decades to pay off, student loans can actually help your score. Likewise, other loans held (and paid consistently) over a long period raise your score. Student loans will figure into your overall debt-to-income ratio, though, so a large student loan or other loan might affect your ability to qualify for (and afford!) a mortgage.
2. Auto loans
Auto loans are secured debt, because the lender can repossess the car if you don’t pay up. In some cases, auto loans raise your credit score by diversifying the types of debt you carry. And because auto loans are harder to get than credit cards, some mortgage lenders may look favorably on you because you’ve already been approved for a loan that wasn’t a slam-dunk.
3. Payday loans
Payday loans don’t usually show up on your credit report. But if you default on the loan, it could ding your credit. These loans are unsecured — the lender doesn’t have any collateral — and their interest rates are often exorbitant.
4. Existing mortgage loans
Mortgages are the classic example of a secured debt, because the bank has the ultimate collateral — a piece of property. Mortgages, when paid on time, are great for your credit score. However, missed payments on previous mortgages will make your new lender nervous.
If you already have a mortgage and are applying for a second one, the new lender will want to be sure you can afford to pay both bills every month, so they will look closely at your debt-to-income ratio. If your second mortgage is for a rental property, you may expect the rental income to count toward the income side of the equation. However, most lenders won’t count rental income until you’ve been a landlord for two years. Until then, you’ll have to qualify for any additional mortgages by using documented income from other sources.
Let your home put up the cash for its own improvements (but not for that new sports car).
With home values rising, homeowners who have equity, a much-valued resource, might be tempted to tap some of that wealth and use it for other purposes. But depending on your personal situation and how you’d like to use the equity, it may not necessarily be the right thing to do.
Here’s when a home equity loan, which allows you to use the equity of your home as collateral, makes sense — and when it doesn’t.
DON’T: Fund a lifestyle
Remember a decade ago when homeowners yanked cash out of their homes as if they were bottomless piggy banks to fund affluent lifestyles they couldn’t really afford? These reckless borrowers, with their boats, fancy cars, lavish vacations, and other luxury items, paid the price when the housing bubble burst. Property values plunged, and they lost their homes.
Lesson learned: Don’t squander your equity! A home equity loan should be looked at as an “investment,” and not as “extra cash” when making spending decisions.
DO: Make home improvements
The safest use of home equity funds is for home improvements that will add to the home’s value. If you have a one-time project (for example, you need a new roof), then a home equity loan might make sense.
Need access to money over a period of time to fund ongoing home improvement projects? Then a home equity line of credit (HELOC) would make more sense. HELOCs let you pay as you go, and usually have a variable rate that’s tied to the prime rate, plus or minus some percentage.
DON’T: Pay for basic expenses/bills
This is a no-brainer, but it’s always worth reiterating: basic expenses like groceries, clothing, utilities, and phone bills should be a part of your household budget.
If your budget doesn’t cover these and you’re thinking of borrowing money to afford them, it’s time to rework your budget and cut some of the excess.
DO: Consolidate debt
Consolidating multiple balances, including your high-interest credit card debts, will make perfect sense when you run the numbers — who doesn’t want to save potentially thousands of dollars in interest?
Debt consolidation will simplify your life, too, but beware: It only works if you have discipline. If you don’t, you’ll likely run all your balances back up again, and end up in even worse shape.
DON’T: Finance college
This may seem like an attractive use of home equity for those with college-age children. However, the potential consequences down the road could be significant. And risky.
Remember, tapping into your home equity may mean it takes you longer to pay off the loan. It also may delay your retirement, or put you even deeper in debt. Furthermore, as you get older, it will likely be more difficult to earn the money to pay back the loan. Don’t jeopardize your financial security.