For most homeowners, the mortgage payment is by far their biggest monthly expense. Spending 60 seconds reviewing it can do wonders for your budget. So, let's take a look...
0:60 Are you paying PMI?
If the amount you borrowed to pay for your home was more than 80% of the appraised value of your home, you're probably paying PMI (private mortgage insurance). PMI payments are not trivial -- and they aren't even tax-deductible. They effectively increase your interest rate by 0.32% to 0.93% (hey, that could be $100 a month!) depending on the size of your down payment.
0:50 Say goodbye to PMI
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 PMI.
0:45 Can you lower your payments by refinancing?
The rule of thumb is, if you can chop a percentage point off the interest rate on your mortgage, you should consider refinancing. However, that's just a rule of thumb -- you'll also need 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 $100 a month can save you thousands over the years.
0:30 Should you prepay?
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. See how much you would save by paying off your loan early with this calculator, then compare your savings with how much your extra payments could earn if invested in an index fund at 11% (the market's long-term historical average annual return) using this savings calculator.
0:15 Tap into your equity
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 the one with the highest interest rates) to generate cash if you need to finance home improvements or have other major expense for which you would be taking on debt. Or, if you are carrying a lot of high-interest debt, you can use your equity to reduce the interest you are paying. The interest will be tax-deductible, too. Just don't go overboard. Mortgages are "good" debt, but they are still debt. Don't abuse your equity. Remember, the collateral for these loans is your home.
Whew, that wasn't so bad, was it? Whatever time it takes, it's certainly worth getting the most bang for all of your mortgage bucks.
Got another minute (or 10)? Here are some resources that could help save you a bundle.
