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60-Second Guide to Managing Your Mortgage

For most homeowners, your mortgage payment is by far your biggest monthly expense. So we think it's completely justifiable to spend 60 seconds reviewing it. In fact, don't be surprised if this brief exercise does wonders for your budget. Let's take a look under the hood and see whether we can find you some savings.

0:60 Find out whether you're overpaying your mortgage lender
If the amount you borrowed was more than 80% of the appraised value of your home, you're probably paying PMI, or private mortgage insurance. PMI payments are not trivial. Depending on the size of your down payment and how much your house costs, PMI can effectively increase your interest rate by as much as 1% -- potentially adding hundreds of dollars to your monthly payment.

0:50 Kiss PMI goodbye
You can get rid of PMI by providing your lender with proof that your mortgage balance is less than 80% of your home's value. (No, an airtight alibi doesn't count.) Do what it takes to get there: Send in extra payments, clearly identified to "apply to principal," to get the loan balance down. Or, if housing values are rising in your neighborhood, get a new appraisal. Talk to your lender and see what you need to do to eliminate your need for PMI.

0:45 Explore the potential savings of refinancing
The rule of refinancing is relatively straightforward: If you can chop a percentage point off the interest rate on your mortgage, you should consider it. However, that's just a rule of thumb -- and, as you know, we Fools never blindly follow the conventional wisdom without doing some due diligence. Most important here is to take closing costs and points into account. What's the easiest way to do that? Give our "Am I better off refinancing?" calculator a whirl. Even reducing your mortgage payment by just $100 a month can save you thousands over the years.

0:30 Calculate the real cost of prepaying your mortgage
Once you get your loan-to-value low enough to banish PMI, is it worthwhile to keep making additional payments to principal? Owning a home outright can be a huge financial advantage, but there's no rush. In most cases, you will come out ahead by sticking to a 30-year payment schedule and investing your extra money in a market-matching index fund. Calculate how much you would save by paying off your loan early, and then compare your savings with how much your extra payments could earn if invested in an index fund earning 8%-10%.

0:15 Tap into your equity
With caveats aplenty, the equity in your home (what it's worth minus what you owe) can be a good source of low-interest funds for major purchases. Consider refinancing (a good first choice), a home equity loan (a feasible second choice), or a home equity line of credit (the most flexible, but often the one with the highest interest rates) to generate cash if you need to finance home improvements or have other major expenses to cover. In addition, if you're carrying a lot of high-interest debt, you can use your equity to reduce the interest you pay. In most cases, the interest will be tax-deductible, too. Just don't go overboard. Despite all of the problems with mortgages during the housing downturn, mortgage debt is still considered "good" debt. But it's still debt, so don't abuse your equity. Remember, the collateral for these loans is your home.

Got another minute? For more on buying and selling a home, read about:

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 11, 2008, at 2:40 PM, prginww wrote:

    I am a mortgage consultant, and in looking over the comments posted here concerning refinancing considerations...I have to say the advice is good. The calculators are also helpful. Keep up the good work.

  • Report this Comment On January 15, 2009, at 5:44 PM, prginww wrote:

    These are some really good tips! PMI is a thief, but like so many things, a necessary evil. A really great strategy is to over pay the mortgage and apply the remainder to the principal until you've hit 20% of the equity, and can get rid of the PMI, and in the long run, the sooner you get more equity in your home, the better, if you decide to refinance. Thanks for the post!

  • Report this Comment On February 23, 2011, at 8:19 PM, prginww wrote:

    I also highly recommend as a former loan officer myself to NEVER escrow your mortgage, even if you have to pay a higher rate. Sometimes the lender will charge you .125% higher as a "hit" for waiving escrows, but it is far worth it in the end. If you are putting only a tiny bit down, the lender will not allow you to do so at all, but if you are refinancing or putting 10-20% down, you can do this. By waiving escrows, you have a truly fixed payment. Never will your servicer be able to raise your payment because your property taxes are higher, or your homeowners insurance premiums are higher. Why let some mortgage co. sit on your money held in escrow when you can manage your taxes and insurance yourself and have a lower monthly payment on top of it? Being able to pay your taxes and insurance yourself provides you far more liquidity.

  • Report this Comment On July 24, 2016, at 11:40 AM, prginww wrote:

    Hello everyone!!! My name is Chelsey Moody from USA. i have been scammed by 2 different Internet international lender, they all promised to give me a loan after making me pay several fees which yield nothing and amounted to no positive result. i lost my hard earn money and it was a total of 2,500.00USD.One day as i was browsing through the internet with tears on my eye i came across a testimony of lady who was also scammed and eventually got linked to a legit loan company called Joshua Porter Loan Investement,where she finally got her loan successfully, so i decided to contact the same loan company,and told them my story on how i have been scammed by 2 different lenders who did nothing but to course me more pains. I explained to the company by mail and all they told me was to cry no more because i will get my loan in their company and also i have made the right choice of contacting them.i filled the loan application form and proceeded with all that was requested of me and I was given a loan amount of $50,000.00 Dollars by this great Company,My dear brother and sister,if you know that you are out there also looking for the right and genuine loan company where you can get a loan,i will kindly advice you all to contact Mr Joshua Porter for your loan,and i know they will never let you down,here is their company email..Contact them now via Email( get your desire loan too,God Bless You All.

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