Mortgage – Homeowner Savings

Being a Homeowner: Struggling with Mortgage

If you are now struggling to make your mortgage payments, you’re not alone. According to RealtyTrac, 1 in every 2,253 homes is in foreclosure. In New Jersey, it’s 1 in every 1,043 homes; in Ohio, it’s 1 in every 1,503 homes.1 And with the novel coronavirus pandemic leading to rising levels of unemployment and income loss, you may feel that you’re also on the fast track to becoming another foreclosure statistic. Know that the federal government is suspending all evictions and foreclosures until the end of April. And if your mortgage payment issues are related to COVID-19, both Fannie Mae and Freddie Mac, which together guarantee more than two-thirds of all mortgages, are offering assistance to those financially struggling due to the fallout of the virus.

Whether your trouble meeting your mortgage payments is coronavirus-related or not, the first thing to do is to call your loan provider. If you can, try doing this before missing payments, as this will keep the largest number of options available to you. Here, experts lay out different options for when you’re struggling to pay on time.

Solution #1: Refinance to Change Your Interest Rate Terms

Refinancing to an adjustable rate mortgage (ARM) is a viable option if you’ve almost finished paying off your mortgage. “More and more consumers recognize the financial benefits an adjustable rate mortgage can provide under the right circumstances,” says Hensling. A perfect example is a homeowner who anticipates selling their home in the next three years and currently has a $400,000 fixed rate loan at 4.25% paying $1,976.76 per month.

Hensling says if the homeowner refinanced to a hybrid adjustable rate mortgage fixed for five years at 2.875%, this would reduce the monthly payment to $1,695.57 per month and save $281.19 per month.

Jeremy Brandt, CEO of WeBuyHouses.com, agrees, adding, “If a home is nearly paid off, the vast majority of the monthly payments are going to equity and not interest. Refinancing to an ARM might solve short-term cash flow issues by reducing the monthly payment at the expense of subsequent payments.” That being said, if interest rates start increasing, the monthly payments may increase over a period.

Alternatively, if you have an ARM, switching to a fixed rate mortgage may not lower your current monthly payments, but it can stop your payments from growing. “This makes sense if current fixed rates are lower than the ARM interest rate, or if you expect to move later than the next three years,” says Brandt. However, he warns that if you’ve been in an ARM for a while, the fixed rate you refinance into may be higher than your existing rate and this can cause your monthly payment to go up.

Solution #2: Request Mortgage Forbearance

Both Freddie Mac and Fannie May released guidelines for mortgage forbearance related to COVID-19. Essentially, they each are providing mortgage forbearance to borrowers financially affected by the novel coronavirus for up to 12 months. That means that individuals can reduce or suspend their payments for that time. Additionally, any related mortgage delinquency won’t be reported to the credit bureaus, so missing payments won’t tank your credit score. After the forbearance is over, lenders will work with borrowers to modify loans to lower monthly payments as necessary.2 3

Solution #3: Refinance to a Longer-Term Loan

Spacing your loan out over a longer period is one option that can reduce your monthly payment amount. Refinancing to a longer-term loan is the simplest way to reduce monthly mortgage payments, especially when cash flow is a problem, according to Al Hensling, president of United American Mortgage in Irvine, Calif.

However, it’s important to note that your interest rate will increase. To offset this, Matt Hackett, underwriting and operations manager at New York-based Equity Now, recommends making higher payments to increase the speed at which you pay down the principal. The majority of mortgages have no prepayment penalty (though you should definitely check yours).

Solution #4: Modify the Loan

A loan modification is an alternative for those who cannot refinance their loan but need to lower their monthly house payment. But, unlike a refinance, it requires a hardship. Pierce says borrowers must show the lender that as a result of a financial hardship, they are not able to continue making the regular monthly house payment. “This process involves extensive paperwork that must be completed and sent to the lender for review,” says Pierce.

She recommends that homeowners get counseling through a HUD-certified organization to fully understand their options and get help contacting the lender. “However, not all lenders offer loan modifications or may just offer short term loan modifications,” says Pierce.

As part of their mortgage assistance plans related to COVID-19, Fannie Mae and Freddie Mac are both allowing borrowers to modify their loans after forbearance.32

Solution #5: Get a Home Equity Loan

Getting a home equity loan may provide immediate assistance to struggling homeowners, but this strategy only works if you have a lot of equity in your house, which means that your home is valued at much more than you owe on it. Anthony Pili, director of strategic planning at Greater Hudson Bank in Bardonia, New York, advises struggling homeowners to consider paying off a mortgage with a home equity line. “Banks usually cover all closing costs on home equity lines. The savings in closing costs can be used to pay off the principal balance quicker,” says Pili.

He adds that this strategy is highly effective for borrowers who have the self-discipline to pay more than what is owed each month, since the minimum payment is usually just the interest that has accrued during the month.

Solution #6: Get the Lender to Eliminate Private Mortgage Insurance

Depending on how much equity is in your home, eliminating the private mortgage insurance (PMI) can lower your mortgage payments. “If you have at least 20% equity in the property, I recommend contacting the lender about dropping the mortgage insurance,” says Pierce. She explains that borrowers who usually don’t pay 20% down are required to have PMI for at least two years, but says there may be exceptions to the two-year rule. For example, if the homeowner made improvements to the house that increased the value, the requirement may be waived.

Solution #7: Challenge Property Taxes

If the value of your home has dropped, challenging your property tax may provide some financial relief, says Cara Pierce, a certified housing counselor at Clearpoint Credit Counseling Solutions, a national nonprofit organization. “You’ll need to contact the county tax assessor’s office in the county in which the house is located to see what type of information they will need as proof that the housing values have dropped,” says Pierce.

However, Pierce says this is a short-term strategy. She warns that as property values increase, property taxes will rise. Also, be advised that it may cost several hundred dollars to have your home appraised.

The Bottom Line

If you’re struggling with your mortgage, don’t throw in the towel. There are various solutions that can help you stay in your home and manage your monthly mortgage payments.

Mortgage Mistakes You Should Avoid

Bad decisions on a $400,000 home loan can easily cost you $100,000.

If you already have a mortgage, it’s not too late to fix old mistakes (or avoid making them with your next loan).

You should review your mortgage every 2 years anyway.

Why? Because less income needed to payout your mortgage means more money for other areas of your life. Your mortgage is probably the biggest financial commitment you will make in life. It is easy to get right and just as easy to get completely wrong.

Most people are surprised to find out that a low interest rate is not the only factor in reducing mortgage cost and paying out a loan faster.

You won’t see lenders advertising most of the tactics available to you, as it’s not in their best interests – the longer it takes to payout your loan, the more money they make. Lenders make money by lending you as much as possible, for as long as possible and with fees as high as they can get away with.

1. You didn’t set up your loan with the right features

There are loan features that you might need now or down the track, such as an offset account or the ability to top up. These features do not have to make your loan more expensive, regardless of what an individual lender might tell you. It’s important to design a loan based on your needs now and in the future.

This is why independent mortgage advice, combined with the assistance of your financial planner, is so important.

2. You’re not getting commission refunded

Some mortgage brokers will cap their income and provide a commission refund. Getting commission refunded on an ongoing basis is probably the easiest way to put $10,000’s back in your pocket over the life of your loan.

It’s also the strategy that’s possibly least utilised, as not many people know about it.

The mortgage broker who arranges your loan receives an immediate commission payment. For a $450,000 loan, your broker would receive around $3,000 at settlement.

In addition, that broker will receive a yearly commission payment (called trailing commission). On a $450,000 loan, your broker would receive about $700 every year. Although that commission reduces as your loan size decreases, trailing commission can last up to 30 years. Mortgage brokers build their businesses on this recurring income. And while they should be paid, you may find one that caps the commission they take.

Trailing commission can create a bias towards lenders who pay a higher % to brokers. In other words, your broker might be swayed to recommend the loan that pays them the most. While many brokers put their clients interests first, this ongoing commission can reduce the incentive for your broker to give you advice on how to pay out your loan more quickly. They may be more inclined to recommend a fixed term with a fixed interest rate, when a variable may be more appropriate.

There are only a few mortgage brokers in Australia who will refund any commission.

Getting this money back, and using it as additional repayments, can take years off your loan.

A note: Some mortgage brokers will tell you they don’t receive commission, but their employers do – and those brokers are paid salary and bonuses to recommend particular lenders.

Can you avoid commission by going direct to a lender?

No – lenders will not bite the hand that feeds them by undercutting every broker in Australia. In addition, they use the commission saved to provide you with loan service otherwise provided by the broker.

How do you get trailing commission refunded if you already have a mortgage?

You can’t get trail commission back on a current mortgage, unless your broker is kind enough to start giving it back to you. However, you can review your current mortgage and work out if it’s worth refinancing.

To summarise, getting a commission refund:

1. Puts money back in your pocket, to help pay out your loan faster

2. Removes the chance your broker will recommend a particular loan because it pays them more.

3. You fell for cheap tricks with rate comparisons

You should almost never pay the Standard Variable Rate (SVR). Each lender’s SVR will vary with others – it is the basis by which your interest rate is determined but not the final rate you are likely to pay. Some banks have higher SVR and so will discount theirs by more to reach the ultimate rate you will pay. Some have lower SVR and so will only apply a small discount.

Therefore, comparing the SVR across lenders does not help you work out which loan is cheapest.

2 tricks to look out for:

Showing a large discount off their SVR to make you think you are getting a great deal. A big discount off a high price still costs more than a small discount off a lower price.
A lender comparing their lowest interest rate with the SVR of other lenders – rates you would never pay if you used those companies.

4. You’re sticking with the same mortgage ‘til the end

Home loans can become uncompetitive in only a few years, or less.

For starters, it pays to check your lender hasn’t jacked up the rate of your loan and is no longer competitive.

Competition improves loan features and you might be missing out on benefits if you stick with the same loan to too long.

You should check your loan remains the best option every 2 years. It costs nothing (but some of your time) to check if there is a better deal. And that time can save you thousands of dollars a year.

A tip: When you set up your mortgage, always assume that you will need to repay early or refinance. If suitable given your overall needs, take out a loan that has low or negligible break costs. This is another reason you should get advice from a broker who will consider the costs of exiting your loan early – ideally a fee based broker who takes their payment only from you, and not the lender.

5. You set your loan term as long as possible

Reducing your loan term just a few years can take $100,000’s off the cost of the average loan.

It’s not always the best strategy to go for the longest loan period possible. Paying a little more off your loan each month can make you significantly more wealthily over the long-term, or at least debt free earlier. You should look at the opportunities presented by a shorter mortgage, such as the ability to focus on your kids’ education once you’re debt free.

Your lender and mortgage broker want you to take out a 25 – 30 year loan as they are being paid interest and trailing commission for the entire time. The longer the loan the more money your lender and broker make.

And using a mortgage offset is not always the best strategy for some people, as the easy access to funds presents a temptation to spend the cash (a redraw facility adds an additional layer of admin and gives access to funds if needed). Always get financial advice with your mortgage advice.

6. You relied 100% on rating websites to make your choice

While useful as a tool for adding to a short list, rating websites are incomplete and often contain inaccurate information. The lenders they feature generally pay these sites and most sites will exclude lenders who aren’t willing to pay a fee. Some sites promote a lender’s most profitable (expensive) loans, rather than the cheaper loans also offered by the same lender.

There are often many inconsistencies in the results of top rating sites when compared with independent research.

7. You focused too much on interest rate

Interest rate is only one factor that influences the total cost of your loan. Going with the lender that offers the best initial interest rate doesn’t mean you have the cheapest loan.

Interest rates can change soon after your loan starts and you can quickly end up with a very uncompetitive and expensive rate. In addition, there are other costs that can make a loan significantly more expensive than it seems, based on the interest rate alone.

Fees might include:

– Lenders mortgage insurance

– Application fees

– Valuation fees

– Legal and settlement fees

– Rate lock fees

– Early payout fees (deferred establishment fees)

– Discharge fees

– Establishment fees

8. You went direct to the lender

Lenders love it when you walk in their doors without being referred by a broker, as they can pocket the commission they would normally have to give the broker. Lenders save by you going direct, not you.

If you deal directly with your bank, you will waste the opportunity to ask a mortgage broker for more broad advice (beyond one lender’s products) and you will never get any commission refunded.

In addition, there are some lenders who do not deal with brokers (or pay commission) and therefore promote cheaper loans. An independent mortgage broker can recommended one of these lenders, as they do not get paid via commission anyway (a traditional commission-based broker will never recommend one of these lenders).

9. You used personal rather than professional reasons for choosing your mortgage broker

Not all mortgage brokers are the same. I’d say almost 100% of people have no idea if they got the best mortgage available; and yet are happy to recommend their broker to their friends (let’s face it, usually because they ‘like’ them personally).

So don’t decide to use a broker simply because your mate is one, or recommends theirs because they ‘got a good rate’. Unless you happen to know an independent mortgage broker, if you use anyone else, you are using one of the 99.99% of compromised and biased brokers in Australia. And, this means you’re giving away $10,000’s of your hard earned cash in the form of commission over the life of your loan. And you may not get the best loan (and therefore pay more in interest and ongoing costs as well).

Everyone wants to support friends and family – and use people they recommend. Just keep this article in mind when you decide to give your business (and hard earned cash) to someone you know or a broker referred by a friend without a professional basis.

To be fair to many mortgage brokers, most are not aware of the inherent conflicts and costs associated with their profession (although most don’t ask or think about it critically). Brokers are taught by their employers, who make billions out of their associations with a hand full of lenders.

Homeowner Tricks: Save Money on Mortgage Payments

Whether you’re new to homeownership or have been making mortgage payments for years, it never hurts to find ways to slash your costs. Here are three tips that can help you save thousands.

1. Pay your mortgage every two weeks instead of once a month

The typical 30-year loan comes with 360 payments, or 12 payments per year. But if you take your monthly payment, divide it in two, and pay that amount every two weeks, you’ll wind up making the equivalent of one extra monthly payment each year while saving yourself a huge chunk of interest in the process. And that single extra payment won’t hurt much, unlike a big lump-sum payment, especially if you work your new payment schedule into your monthly budget.

Say you’re looking at a 30-year, $200,000 mortgage at 4%, which would normally translate into 360 monthly payments of about $955 each, or roughly $11,460 a year. If you were to switch to a biweekly payment schedule, you’d pay $477 every other week, or roughly $12,400 a year. But in doing so, you’d actually save yourself over $23,000 in interest over the life of your loan.

2. Refinance to a shorter term

One drawback of refinancing a mortgage is that it often resets the clock on your repayment schedule, which can not only cost you more money than necessary in interest, but drag out the repayment process so that you’re less likely to have shaken your housing debt by the time you retire. For example, say you’ve been making payments on a 30-year loan for five years, and then you refinance to another 30-year loan at a more favorable rate. While you’ll lower your monthly payments, you’ll also be five years older when you finally get that mortgage paid off.

On the other hand, if you refinance to a shorter term (say, from a 30-year loan to a 15-year loan) to take advantage of a more favorable rate, you’ll save money on interest and avoid extending the amount of time you’re saddled with mortgage debt. Of course, this strategy only works if you can actually afford a larger monthly payment. (Remember, while you’ll benefit from a lower interest rate, your actual payment will still be higher if you switch from a 30-year loan to a 15-year mortgage.) But if your earnings have increased substantially since you first signed your loan, and you have room in your budget for higher monthly payments, you’ll come out ahead in the long run.

Homeownership is an expensive prospect, so it pays to take steps to lower your costs. These tricks will help you spend less on your mortgage and keep more of your money where it belongs — in your pocket.

3. Accelerate a 30-year loan when you can’t afford a 15-year term

One major advantage to getting a 15-year mortgage, as opposed to a 30-year loan, is that you’ll generally be eligible for a much lower interest rate. For example, last week, 30-year fixed mortgage rates averaged 3.97%, while 15-year fixed rates averaged 3.23%. The downside, however, is that because you’ll be paying off your loan in half the time, despite the lower interest rate, your individual monthly payments will be considerably higher.

If you’re looking to benefit from some of the interest savings of a 15-year loan but are afraid to commit to a more sizable monthly payment, a good solution is to get a 30-year loan and simply pay it off faster. You can accomplish this by doubling your monthly mortgage payment when you have extra cash available or by making extra lump-sum payments toward your mortgage as you’re able.

Say you have a 30-year, $200,000 fixed mortgage at 4% interest, and you use a performance bonus you receive at work to make a $5,000 payment toward your mortgage during the second year of your loan. That move alone will save you close to $10,000 in interest and shave more than a year off the life of your loan.

If you want to attempt to pay off your mortgage early, just make sure your loan doesn’t come with prepayment penalties. Otherwise, you’ll be charged a fee for the privilege of wiping out your mortgage debt sooner.