One of the best ways to improve your budget, reduce debt, and increase retirement savings is to refinance your home mortgage.  Reducing your mortgage payment can go a long ways towards creating extra cash flow to be redirected to more important areas of our financial lives.  I’m not going to dwell today on the question of whether or not you should refinance.  I’ll talk about that some other time.  Today, I just want to take a moment and share with you many the different types of mortgages available to you to use as a tool in meeting your financial goals.  As with any tool, there is potential danger when used improperly, but when used as designed, there can also be a great benefit.

There are really 3 basic classes of mortgage: Fixed, Variable and Specialty.

Fixed mortgages come in 3 basic flavors: FHA, VA, and Conventional. An FHA loan is a government insured loan, insured through mortgage insurance that is funded into the loan.  These are great for first time homebuyers since the credit scores and down payment requirements are minimal and rates are competitive.  Conventional loans are what our grandparents remember as the only option “back in the day”.  These mortgages require a bit more of a down payment, typically 20%, and typically have terms of 10-30 years, though there are some fully amortized options for 40 and 50 year terms floating around out there now. VA loans are a lot like FHA loans, but are specifically for our service men and women (thank you to those of you who serve our great country!!!).  The biggest benefit of a VA loan is that no down payment is required. 

Variable Mortgages, or Adjustable-rate Mortgages (ARMs) come in all different flavors.  FHA and Conventional mortgages have an adjustable option.  There are also adjustable mortgages that give you a payment option, meaning you can choose to just pay the interest, you can pay an amount equal to what it would take to pay the mortgage off completely within 10 yrs., and usually a few options in between.  Some mortgages even allow you to pay less than the interest that is accruing on to balance.  All of these terms and rates can adjust weekly, monthly, annually, or remain fixed for a certain time period before adjusting.  Some of these mortgages have taken flac for being the cause of the housing bubble and so many foreclosures in recent years.  I would argue that again, there aren’t bad tools, just poorly selected ones used for the wrong purpose. 

Specialty loans are exactly that, specialties.  Each one has a specific use and can’t be used for other purposes.  Streamlined-K loans and 203k loans are for the purchase of homes that need repair work, providing funds to do those repairs within the mortgage.  Equity loans and Home equity lines of credit (HELOCs) allow you to access the “equity” in your home for various purposes.  Bridge loans are used to access “equity” in a home that is on the market but has not yet sold to purchase another home.  Reverse mortgages can be used by anyone over age 62 to access “equity in their home to enhance their lifestyle during the twilight of their lives. 

As I said at the beginning, I believe each of these tools has a place, but we must take the time to educate ourselves so we know which tools to use. 

We all know that if we have bad credit we can be penalized when it comes to interest rates on our loans.  This is true for mortgage loan as well.  Here are a few  little-known tips to improve your credit scores and give you a chance at better interest rates. 

First, you must remember that this is a process and won’t change your scores overnight.  It takes time and some diligence on your part.  If you’re planning on refinancing or purchasing a new home, you’ll want to use these tips 3-6 months before you start applying for a new mortgage. 

Second, be aware of credit repair scams.  There are lots of good and reputable companies out there that really can help you, but there are also plenty of scams out there.  The Federal Trade Commission website has plenty of information on the rules of credit repair.  You should get familiar with these rules to make sure you’re not doing more damage than good, and not being scammed. 

Third, get a current copy of your credit report.  You can go to www.annualcreditreport.com and request a report from each of the three major bureaus.  You want to keep inquiries to a minimum since each inquiry can impact your score by as much as 50 points (most won’t be that impactful, but some can be).  Mortgage and auto inquiries have a 14 day window before they get counted as multiple inquiries, so if you’re shopping lenders, do so within that timeframe so you don’t adversely affect your scores.

The last tip for the day is to not close all of your existing accounts.  If you have multiple credit cards, spread out the debt onto a couple of them so none of your cards have high balances.  Then, once debt is paid off, those long-term credit lines with balances available help boost your score.  These lines of credit show that you are able to have credit available to you and be disciplined enough to use that credit wisely. 

Taking the time to be up to speed on your credit, and using little tricks like these can save you thousands of dollars over your life time, so take a few minutes and make sure you are credit savy!

To refinance or not to refinance, that is the question.  When you refinance your home mortgage, you are basically paying off your existing mortgage by taking out a new loan.  You may do this to lower your loan payment or reduce your interest rate.  You may even refinance to get some cash at closing.  The question is “is refinancing right for me?”

We at 52 Weeks to Prosperous Living are big fans of refinancing when it makes good financial sense.  So here are a few things to look at when trying to decide whether or not you should refinance.

1.      What is your purpose?  If your main aim is to get cash to purchase more toys or free up cash to spend more on a fancy car, DON’T DO IT!!!  If your goal is to reduce the amount of interest you will pay over your lifetime or free up cash to reduce debt, or possibly even use some cash at closing to consolidate your debt, refinancing very well may be right for you.  It can be a great way to free up cash flow to get out of debt more quickly, and possibly one of the easiest.

2.      If your purpose is going to be beneficial to your overall financial picture, then the next step is to gather information.  You may know what your monthly payment is, but you need to also look at your current interest rate and the terms of your loan, as well as the type of loan you have (our mortgage refinance worksheet is a great tool for this and makes it really easy).  Now that you have this information handy, you can compare your options and see if you can reach your goals by refinancing.

3.      Find a good mortgage professional.  Typically a bank can do your mortgage, but you’ll get a lot better offering from a good professional that has access to multiple lenders.  A good professional will walk you through every step of the process, including helping you understand the true costs of your mortgage, you know, the ones that don’t show up in the interest rate.  If your goal is saving interest over the long haul, make sure you plan on staying in your home for a while, since the way mortgages are amortized means yo pay mostly interest the first few years. 

4.      Be disciplined!!!  This is key to your financial success.  Be disciplined in using the money saved by refinancing your mortgage to better your financial situation.  Don’t get caught up in the keeping up with the Jones’s. 

Like any financial tool, refinancing your mortgage can be a great boon to your financial success, but only if used properly.  Be smart.  What more can I say?  If you’re unsure, use a trusted advisor to help guide you.  Remember, slow and steady wins the race!