If you’re looking to purchase a new home, you’re probably going to need to get a mortgage. Mortgages are home loans that provide you with the upfront capital to purchase your home. In return, you’ll pay off the balance of the loan, along with interest, taxes, and insurance (known as the mortgage premium), over the course of time.
Just like a credit card, a mortgage’s interest rate varies from borrower to borrower and lender to lender. Lenders assign interest rates based on their lending standards, your credit score, the current market, and a number of other factors. Terms can range from extremely favorable to jaw-droppingly expensive.
Whether you’re looking to get the most favorable mortgage terms possible, or want to optimize an existing mortgage, you’ve come to the right place. Read on to learn 3 ways to get the most out of your mortgage.
Pay Attention to APR
Looking to buy a home? There are a lot of different elements that go into home loans. It’s not just a matter of loan amount and interest rate; a mortgage includes taxes, premiums, closing costs, and more. This total amount sits under the umbrella of a single term: annual percentage rate, or APR.
APR is the yearly rate of interest and other additional costs associated with your loan payment. For instance, a mortgage with an APR of 10% means you’ll be paying an additional 10% of your loan amount in fees each year.
Here’s another thing to know about APR: it comes in two different forms.
A fixed APR has a single rate for its lifetime. Your APR will remain the same throughout the entirety of your loan, regardless of changes in the market .
A variable APR, also known as an adjustable rate APR, is tied to an index, like the prime rate. If the associated index goes up, as does your APR. If it goes down, your APR does, too.
Mortgage lenders know that many borrowers aren’t aware of the difference between APR and interest rate. They take advantage of this mistake by advertising mortgage rates with extremely low interest rates. What they don’t advertise is that the other factors that determine APR, like premiums, are extremely high, making the loan unfavorable.
Don’t get fooled by a low interest rate; always look at APR for the full picture.
Explore Refinancing Options
If you’d like better terms on an existing mortgage, it may be time to look into refinancing. Through refinancing, a borrower can take out a new mortgage that both pays off the existing mortgage and offers them different financial benefits, whether that may be lower interest rates, better payment terms, or even cash-out options.
There are a few different ways to refinance your home.
Rate and Term Refinance
Rate and term refinancing is the most common type of refinancing. A borrower takes out a new loan that has different rates or terms than their original loan. They may be left with a new mortgage payment that has a lower interest rate, better monthly payment, or offers them other financial savings.
Borrowers may opt for a rate and term refinance for a number of different reasons. The most common is a change in the market. When interest rates go down, those with fixed interest rates may refinance in an attempt to benefit from the more borrower-friendly market. Others may choose to refinance because they’ve made significant changes to their finances or credit score and believe that could earn them more favorable terms. Lastly, some may refinance to free up capital that allows them to meet other financial demands.
Has your home increased in value? If so, you may be able to take advantage of cash-out financing. Cash-out refinancing allows borrowers to utilize the new equity in their home to free up cash, in return for a higher loan amount. For instance, a borrower whose home has increased in value by $100k may opt to take the $100k in equity out of their home, and in turn they will owe $100k more on their refinanced loan.
This type of refinancing allows a borrower to pay a significant portion of their loan down in a lump payment and, in turn, receive more favorable terms.
Consider a Reverse Mortgage
Are you concerned about having enough funds to make it through retirement? It’s a common problem for many seniors. Come retirement age, they find themselves pinching pennies and worrying about how they might support themselves through the next few decades of their lives. Fortunately, there’s a type of mortgage designed exactly for this concern, known as a reverse mortgage.
A reverse mortgage, also known as a home equity conversion mortgage, is a type of mortgage that allows you to leverage the equity in your home to free up cash to pay for virtually any expense.
Unlike cash out refinancing, a reverse mortgage doesn’t require your home to have gone up in value in order to access capital. Istead, it’s a federally insured program that allows you to withdraw equity from your home—typically, in tax-free income. Reverse mortgages are also different from cash-out refinancing in that they don’t require monthly repayment. While payments are allowed, they aren’t required until you sell your home, vacate the property, or pass away.
In order to qualify for a reverse mortgage, you must meet the following requirements:
+Age 62 or older
+Own at least 50% equity in your home
+Occupy the home as your primary residence
+Live in a single-family home, two to four-unit property, townhouse, or FHA-approved condo
+Have sufficient income or assets to cover property-related expenses like property taxes and mortgage insurance
Mortgages are a decades-long commitment. It’s important to make sure that the mortgage you choose suits your needs and enables you to live the life that you want to live. Fortunately, there are many options to find the right home loan or modify the terms of your current mortgage for a more favorable arrangement. Follow these tips to get the most out of your mortgage.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. He is currently a contributing editor for 365 Business Tips. Matt is passionate about marketing and business strategy and enjoys the San Diego life, traveling and music.