Plenty of Americans deal with mortgage debt. In fact, 42% of households have mortgages. However, even though less than half of households have a mortgage, mortgage debt accounts for 70% of all American debt. It may seem hard to manage your mortgage, especially if it is your first time having one. Luckily, it doesn’t have to be! There are some mortgage management tips that you may be able to benefit from. These tips come from others who were able to make the most out of their mortgage and professionals in the industry that have recommendations. However, we want to remind you that every mortgage is different and what may be best for you may not be best for someone else! So make sure to talk to a professional before making any big financial decisions if you feel you need some more guidance.
Understanding Your Mortgage
First, before you can learn how to better manage your mortgage, you want to make sure that you have a clear understanding of what your mortgage is. Obviously, you should have a pretty good idea since you signed the agreement for it but we will brush you up on the basics! Your mortgage is the loan that is used to purchase your property. When you enter into a mortgage, the borrower (you) agrees to repay the lender over the course of a set period of time. The payments you make to the lender are split between your principal balance and your interest. This is a secured loan because the property is collateral until the loan is fully repaid. There are a variety of different types of mortgages available, that all have their own set of pros and cons for your finances, lifestyle, etc.
How to Better Manage Your Mortgage?
On average, Americans spend roughly $1,487 a month on their mortgage. That’s a lot of money that people may not know how to plan around. However, some ways that people better manage their mortgage includes:
- Making a Budget
- Having Emergency Funds Ready
- Keeping Up with Your Mortgage Payments
- Paying More Than the Minimum Due
- Consider a Refinance
Making a Budget
While this may seem obvious, many homeowners actually don’t have a proper budget together. Having a budget is important because it can easily show you how your mortgage will fit into your monthly finances. You will want to get together your expenses for the month. People can have a lot of bills that they need to deal with besides their mortgage like student loans, groceries, medical debt, credit card debt, a phone bill, utilities, and more. That is why listing out all of your expenses can be helpful so that you know what you need to deal with when paying your mortgage.
Now that you have a list of your expenses together, you will want to get together your monthly income. Once you know your monthly income, you can compare how much you are making versus how much you are spending. The leftover amount can be seen as “disposable income” which is income that is not actively being used. That means it can be saved or spent. After gathering all of the details of your financial situation, you will want to make sure you can make plans to keep your finances healthy.
There are plenty of different budget setups that people like. However, a popular one is the 50-30-20 rule. This budget structure gives 50% of your monthly income towards needs (like bills), 30% of your monthly income towards wants (like getting your nails done), and 20% of your monthly income towards savings. These percentages can be worked around but you want to make sure that you have some structure when it comes to your mortgage and your other expenses!
Having Emergency Funds Ready
It’s good to prepare for the worst. When we say the worst, we don’t mean a zombie outbreak. Instead, we mean home emergencies like your foundation cracks, your water heater breaks, a window shatters, etc. Life is full of unexpected events. That means that you will want to make sure that if your home goes through something that needs a quick repair, that you will be able to handle that cost. A good rule of thumb is to have at least three months to six months worth of your total monthly expenses saved up as an emergency fund. For example, let’s say your total monthly expenses are $3,000. That means that you will want to have at least $9,000 in your emergency savings fund (but the more, the better)!
Keeping Up with Your Mortgage Payments
You want to make sure that you keep up with your mortgage payments. That’s because if you fall behind on payments you can deal with a wave of reactions. You may deal with late fees, your credit can take a hit and lower your credit score, and you can impact the relationship with your lender.
Mortgage Late Fees
Typically, you will have a grace period to make the payment after the due date. However, if you do not make a payment by the end of your grace period, then your payment will be considered late. The amount that you will need to pay in late fees depends on factors like the type of loan you have. Depending on your state, there may be limitations on how much lenders can charge for a late payment.
Credit Score Impact
Besides having to pay more money for a late fee, your credit score can take a hit. Your credit score is what lenders use in order to determine your creditworthiness. There are 5 main factors that can affect your score which includes your payment history at the top of the list. If you have a late payment on your record, that will go on your credit report if the lender reports that activity to the credit bureaus. Credit bureaus are required to report accurate information so if you have a valid late payment then you can expect it to fall off your credit report after about 7 years.
Lender Relationship Impact
This isn’t to say that your lender will treat you differently if you have a late payment. But it can definitely impact the relationship you have together. That’s because if you ever try to submit a request for something, they will keep in mind that you were late on payments once before. This can impact their decisions! For example, let’s say you wanted to raise your credit limit but were late on one of your credit payments, this factor may impact whether or not they boost your line. That same concept can be applied to your mortgage!
Paying More than the Minimum Due
Some people are in a better financial position than others. If that’s the case, you want to make sure you take advantage of that. Let’s think about it like this. If you have an interest rate of 3.5% over the course of an entire 30 year mortgage then you will want to try to pay off your mortgage sooner rather than later. For example, if you pay off your mortgage after 27 years instead of 30 years then you save on 3 years of interest! That means you can save more in the end.
Consider a Refinance
Another way that you may be able to pay less on your mortgage is to consider a refinance. Refinancing your mortgage can help you save even more on your mortgage. For example, let’s say originally you got a 30 year mortgage with a 4% interest rate. After about 7 years (when you have 23 years left) you decide to refinance your mortgage. This gives you the chance to change your loan terms down to 15 years and even refinance at a better interest rate of 2.9%. This can result in thousands of dollars of savings compared to your original loan terms!
When you have a mortgage, it is important that you properly manage it. In fact, if you take the steps to better manage your mortgage you could see thousands of dollars in savings over the course of your loan. Take your time, and if you need any help you may benefit from getting in touch with a professional.