Few things are as American as baseball, hot dogs, apple pie, and homeownership. Americans have always valued freedom, security and the pursuit of happiness… all traits that can be associated with owning a home. That’s why, as important as it is to carefully select the right house, it’s equally important to wisely finance that house. Here are three smart tips from real estate author and educator Tara-Nicholle Nelson to help homeowners avoid mortgage mistakes:
1. Consider Working with a Mortgage Broker or a Private Mortgage Banker
Many prospective homeowners think the only way to obtain a mortgage is through their personal bank branch. Even if your bank does a decent job with your credits and debits, and has ATMs conveniently scattered across the city, mortgage brokers and private mortgage bankers may have an edge because they can offer you a satisfactory personalized lending experience in terms of speed, customer service, or assertiveness.
By using a mortgage broker or a private mortgage banker, preferably referred from friends or relatives, chances are good that the prospective homeowner will find someone who understands the importance of personalized customer service, is familiar with the local area, and experienced with getting deals closed in a timely manner. Check to see if the mortgage broker’s company has its own bank, which can allow the financial professional to shop a variety of banks’ offerings to find the best options, and coordinate the transaction via a pool of local, experienced appraisers.
2. Don’t Automatically Avoid Long-Term Debt
Some people do not take the plunge of homeownership because they can’t stand the thought of having a 30-year debt and the payment on a 15-year mortgage is too high for them. There are affordable ways to pay off a mortgage quicker than the loan’s term, and these do not involve winning the lottery or hoping that some long-lost uncle leaves you an inheritance when he passes away!
Many financial institutions have special plans that allow people to pay half of their monthly mortgage payment every two weeks. Such a schedule results in a full extra payment every year, which can pay off a mortgage as much as five years early. Other homeowners decide to pay an extra $100 or so as often as they can, and ask their loan servicer to apply the overage to the principal. Another method involves using paycheck raises over the years, or amounts once paid to extinguish credit card debt, to pay mortgage balances off early.
3. Consider Refinancing a “High” Interest Rate even in an “Upside-Down” Situation
According to Ms. Nelson, about 11 million Americans (about 23% of all homes) are currently “upside-down” or have “negative equity” on their homes. This means they owe more on the home than what it’s worth. Many homeowners with negative equity feel they are trapped in their 6%, 7%, or even 8% interest mortgages. They think no lender will refinance their loans and thus pay hundreds of extra dollars each month because they can’t take advantage of today’s rates around 4%.
The good news is that some options exist for homeowners to lower their interest rate and monthly payments even if they are upside down. Banks are increasingly amenable to modifying existing mortgages to render them less prone to default and foreclosure. This is especially the case when the homeowner is trying to recover from a financial hardship like interrupted income due to job loss or illness. Many banks have a loss mitigation department which can offer loan modifications on mortgages as much as 25% underwater (so long as no payments have been missed) through the Making Home Affordable Program. In addition, many mortgage brokers have access to loans from the Federal Housing Administration’s Short Refinance Program.
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