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Early payoff, equity and more: infinite mortgage possibilities
Drinking that perfect cup of coffee on your patio, hanging family pics on your walls, hosting dinner parties. You’re probably enjoying all the perks of your new place. But after you've settled in for a couple years, you might start wondering what other mortgage options are out there for you and how you can make your financial situation even better.
While your initial mortgage solution may have seemed like a done deal, your mortgage is actually an ongoing part of the homeowning process. You’ve got options that can set you up for future success (and make you a mortgage pro). Following are key tips you should know about.
When to refinance
To refinance or not to refinance—that's bound to come up for most homeowners. "If you purchased a mortgage sometime in the last year or two, you probably have the lowest interest rate already," says Scott Lindner, National Sales Director for TD Mortgage. "But if interest rates decline further, you still may want to consider refinancing."
Jonathan Giles, Head of Consumer Direct Lending at TD adds, “You don’t want to miss out on a refinance opportunity, especially if you're able to drop your rate enough to more than cover any type of closing costs.” Another helpful tip? You can often find lower rates when you refinance to a shorter-term mortgage. While you may have a higher monthly payment, you can save yourself some serious cash when it comes to interest over the long term. To answer the refinancing question, keep an open mind—you never know what life (and the market) has in store for you.
Turn equity into opportunity
Say you bought your home for $300K, but now it’s worth $350K. (Nice!) Home equity is the difference, so in this case, it’s $50K. Lindner says that you can always consider tapping into your home equity, especially since “values of houses have moved up in the last few years.”
Lindner says, “A home equity loan can also be a good option because it keeps your low-rate first mortgage in place, while still allowing you to access your equity.” This means you get a chunk of money up front and make payments. Or, you can take out a home equity line of credit (HELOC), which provides you ongoing access to the equity in your home with the added benefit of only paying for what you use.
Whether you opt for a home equity loan or HELOC, the money can go towards home renovations, some education expenses, purchasing an additional property and more. However, make sure you’re using this money wisely. You’ll be paying interest on the equity for many years to come, so you might want to think seriously before dropping your dough on that all-inclusive vacay.
In addition, if you pay for private mortgage insurance (PMI) and you now have 20% or more equity in your home (due to payments you’ve made or increases in value), refinancing could help you eliminate this expense.
If you have refinancing questions, don’t be shy. Contact your lender early and often to get the most out of your mortgage—doing so could help with everything from home renovations to even saving money.
Early payoff: a special reward
Paying off your mortgage earlier also has perks. “You can make arrangements with mortgage companies or the bank to pay every two weeks,” says Lindner. “Those extra principal payments can help reduce interest and pay off the loan early.” However, some banks might penalize you for early payoff, so double check with yours.
Work bonuses or any other extra cash can go towards your mortgage, too. Lindner explains that some “banks will also let you make extra principal payments throughout the year, and you can re-amortize the loan, bringing down your monthly payment.”
If hardship happens
Hard times happen to the best of us. “If you know your budget is tight, or you’ve experienced a job loss, reach out to your lender and talk to them about your financial situation,” says Giles. “Most will try to help you figure out solutions.”
There are a few routes you can take if hardship impacts your mortgage.
- Forbearance: stopping or pausing payments for a period of time
- Modification: changing the terms of your original mortgage to reduce your payments
- Foreclosure: a last resort that involves losing your home
If hard times happen, don’t lose hope. “Banks have had a lot of flexibility in this last year, and if you’re in this situation today, there are usually options that can really help,” says Lindner.
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This article is based on information available in February 2022. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.