5 Important Reasons Why You Should Pay Off Your Mortgage Sooner Than Later

Pay Off Mortgage EarlyPaying off a mortgage loan takes a very long time, especially if it’s a 30 year or longer loan, so you might want to pay it off earlier than that. While paying off a mortgage sooner than its term has its disadvantages, like being left without savings or not being able to invest the money instead, it can also be very beneficial for most borrowers. The peace of mind and savings in interest that paying off your loan sooner bring can far outweigh the negatives (Read: Should You Pay for You Home In Cash Upfront?).

A mortgage payment is most people’s highest monthly bill, so getting rid of it will free up a significant amount of money each month. That money can make your life a lot easier. You can afford to pay off other debt, take out another loan, or use it to live better. Unfortunately, in order to pay off a mortgage earlier, you will have to come up with a large sum of money if you want to pay everything all at once, or more money each month if you decide to pay it off by making extra mortgage payments. Unless you have significant savings, inherit a large sum of money, or receive a pay increase from work, you are facing some difficult financial times until the debt is paid.

Ways to Pay Off Your Mortgage Early

There are several ways in which you can take care of a mortgage loan earlier than its term. Some methods are quicker than others, or require a larger sacrifice, but all of them will help you get rid of your mortgage quicker than the loan’s original term. Here are the most popular ways of paying off your mortgage early.

  • Pay more each month or make extra payments. You can add an extra amount to each monthly payment each month in order to pay off the loan early. Alternatively, you can choose to make a mortgage payment every two weeks instead of each month, which will result in 26 mortgage payments made each year, instead of only 12.
  • Pay a large part or your entire mortgage at once. You can use money from your savings, investments, bonuses or an inheritance to pay off a portion of your mortgage or even all of it.
  • Refinance into a shorter term. Refinancing your mortgage loan into a loan with a shorter term will make your monthly payments larger, but, if you can afford it, it will help you save significantly in interest (Read: Things to Remember Before Refinancing a Mortgage).

Reasons Why Paying off a Mortgage Sooner is Beneficial

Depending on several factors, paying off your mortgage sooner than later can be to your advantage (read more here). Generally, the benefits outweigh the downsides, but taking this step is not something that many home owners can afford to do. Unless your interest rate is really low, you should do your best to try and pay off your mortgage loan early. Here are some of the reasons why this is a good choice.

  1. Peace of mind. Like most people, you probably have a lot on your mind. Taking care of your largest monthly bill will surely relieve a significant amount of stress, and make your life and your family’s life much easier. Truly owning a home is a great feeling, and you shouldn’t wait until you are old to experience it (Read: Are You a Twenty-Something Wanting to Buy a Home? Here’s What to Know). Not having to pay a mortgage anymore also means that you have other possibilities of investing and you are more in charge of your financial life.
  2. Savings in interest. With a 30-year mortgage loan you pay almost as much on interest as you do on the principal. Paying the principal early means that you will save tens of thousands in interest. Making just an extra mortgage payment per year can save you thousands of dollars.
  3. Improve your credit score. As long as you have a large debt, you are considered a large risk, and your credit score will reflect that. Once you get rid of your mortgage, your credit score improves, and you will be able to qualify for more credit. You can get new loans, for buying a car or even a new home, because your cash flow will be larger (Read: Top 10 Components for Maintaining a Good Credit Score).
  4. Avoid the risk of losing the home. Investing money while you still have a mortgage is riskier because, if something goes wrong with your investments, you risk losing your home as well. Also, losing a job or having large medical bills will increase the risk of losing your home. If your mortgage is paid off, the home is yours and you don’t risk losing it to foreclosure anymore.
  5. Most times it makes sense financially. Some people will argue that you lose the tax break, or you could earn more if you invest the money. That may be true is some cases, but the tax deduction argument is often exaggerated, and you are probably saving more in interest than you would make on an investment. To read more click here.

Even though there are reasons why paying off a mortgage early is not recommended, most of the times the benefits of doing it are far greater than the alternative. Sure, having cash on hand for emergencies and making other investments makes sense, but so does avoiding paying tens of thousands in interest. But probably the biggest advantage of paying off your debt sooner is the peace of mind that it gives you. Living with the knowledge that you can lose your home if you come across financial problems is very stressful, so paying off your mortgage early not only saves you money, but also allows you to enjoy life better.

3 Reasons It Is Going to Be Harder to Get a Reverse Mortgage

Tighter Reverse Mortgage RestrictionsReverse mortgages have been giving home owners over the age of 62 the chance of borrowing money against the equity in their homes. Seniors are usually on low fixed income, so reverse mortgages are very helpful for those who wish to pay off some debt, have unpaid medical bills, or simply need the money for living expenses. Not having the chance of finding a better job or investing money into something that will generate a profit can be really tough financially on seniors, especially when compared to younger people.

Reverse mortgages allow those who qualify to borrow money in the form of a lump sum, which allows them to take out the entire loan proceeds at once, receive the money as monthly payments, or receive as a line of credit. The money that you take out from a reverse mortgage can be used for virtually everything, from paying off your mortgage to paying for utilities and food (Read: You Can Borrow How Much With a Reverse Mortgage?). This is a great way for seniors to acquire some much needed money without having to worry about paying it back. The debt must be paid off if the home owner moves, sells the home, or dies. If the borrower dies, the remaining heirs will have to pay off the reverse mortgage if they want to keep the home. If the heirs decide to sell the home, they come into possession of any equity remaining after selling the home.

Unfortunately, it looks like taking out a reverse mortgage is going to become more difficult. People who were hoping to take out a reverse mortgage in order to resolve their financial problems will, most likely, have to look at other loan options as well. New rules will now impose stricter limits on how much someone can borrow with a reverse mortgage. The pricing of a reverse mortgage will change and the requirements will become much tighter. To read more about the tightening restrictions click here.

Why are There Changes Being Made?

After the economic crisis, more and more home owners took out reverse mortgages because they were having a difficult time making ends meet. Most of these borrowers took out the whole loan amount at once, putting a strain on the program’s funds. Lenders also recommended taking out the money as a lump sum because they were being paid more than when borrowers took out the money as monthly payments or lines of credit.

Lenders were unable to recuperate all the money that they gave out because home prices went down, so the reverse mortgages were not paid off in full. This has also hurt the reverse mortgage program, making these changes inevitable. Most reverse mortgages are backed by the Federal Housing Administration (FHA), who is implementing these changes in order to strengthen the program. The FHA is hoping that borrowers will start treating the equity in their home more carefully by tapping it slowly than before. Go here to read more.

What Will the Changes Be and How They Will Affect You?

Before these changes, almost anyone who met the basic qualifications could take out a reverse mortgage. Borrowers pretty much only had to be 62 or older and use the home as a primary residence. But things are about to change, so here are 3 reasons why getting a reverse mortgage will be harder.

Reason #1 – Reverse Mortgage Loan Limits

The amount that the borrowers can withdraw in the first year will be reduced by 40 percent. For example, if a borrower was eligible to withdraw $250,000 before the new rules, he or she will only be able to withdraw $150,000 once the new rule regarding the first year withdrawal is implemented. Borrowers whose existing mortgage and other debts exceed the 60 percent limit will be able to withdraw a little more. Home owners will have to pay off those debts, which are considered mandatory obligations, so they can withdraw enough to pay them, plus an extra 10 percent of the maximum amount that is allowed. Credit cards do not count as mandatory obligations, so borrowers cannot take out extra money to pay them off.

Also, the two types of reverse mortgages that are available now, the standard and the saver, will be pretty much eliminated and consolidated into one reverse mortgage. The amount that you can borrow will still be influenced by the youngest borrower’s age, the value of your home, and the interest rate. However, once the new reverse mortgage rules are implemented, most borrowers will have access to 15 percent less equity.

Reason #2 – Reverse Mortgage Pricing

The cost of taking out a reverse mortgage will be calculated based on the amount that is borrowed. Borrowers who take out more than 60 percent of the allowed amount in the first year will have to pay higher upfront costs. People who stay within the limit will pay .5 percent of the appraised property value as an upfront mortgage insurance premium, while those who go over the 60 percent limit in the first year will have to pay a 2.5 percent mortgage insurance premium. The annual mortgage insurance premium will remain 1.25 percent of the loan balance for both types of borrowers (Read: Want a Big Cash Payout? Don’t Look to Reverse Mortgages!).

Reason #3 – Reverse Mortgage Qualifications

The new reverse mortgage rules require lenders to make sure that their borrowers are able to afford paying property taxes and insurance during the life of the loan. Lenders will have to analyze the borrower’s income and credit history before giving out a reverse mortgage.

Lenders will also need to factor in the borrower’s living expenses, such as utilities and property related costs, and determine if the borrower has enough money left to pay for insurance and taxes. If your lender comes to the conclusion that you are unable to pay your taxes and insurance after all the other expenses, you will be asked to set money aside or it will be deducted from your reverse mortgage payments (Read: Reverse Mortgages – Not the Smart Investment You Thought They Were).

Conclusion

All these new rules and requirements have the potential of disqualifying many borrowers that would have easily qualified for a reverse mortgage in the past, but should not be a big problem if you take the time to work on your budget a little bit. Taking out a reverse mortgage is becoming harder, so it would be wise to look into other types of loans, as well. Reverse mortgages are designed for seniors, but that doesn’t mean you won’t be able to take out another loan, if it suits you better.

10 Clever Ways to Save Money Using Home Buyer Tax Deductions

Top 10 Tax Deductions for Home Buyers-150x150Buying a home is a dream come true for most people. While becoming a home owner usually involves a great financial sacrifice, it does come with some perks, besides owning your own home, of course. Many expenses related to your home are tax deductible, and these deductions apply to any type of home: town house, apartment, mobile home, single family residence and more. Unfortunately, this will complicate your taxes, but the extra effort put into detailing your deductible expenses is well worth it.

From the time you become a home buyer until you decide to sell, your home will provide a lot of tax benefits. Consulting a professional advisor in order to get all the details is always a good idea, but here is a list of the top 10 tax deductions for home buyers.

Top 10 Deductions

1. Mortgage Interest Deduction. If your mortgage loan is less than $1 million, then the interest that you are paying is tax deductible. For the first few years, your monthly payment will be mostly made up be interest, so this tax deduction will make our home more affordable, especially if you are a first time home buyer.

2. Points Deduction. When taking out a mortgage loan, your lender charges you a variety of fees. One of these fees is called “points” and one point equals 1 percent of the principal on the loan. Unlike in the case of a mortgage refinance, where the points are deducted over the life of the loan, when buying a home with a mortgage loan, the points are fully deductible up front.

3. Interest Deduction on a Home Improvement Loan. If you take out a loan in order to make “capital improvements” to your home, be aware that the interest on this loan is tax deductible. Capital improvements are improvements to your home that increase its value or extend its life, and should not be confused with simple repairs. In case of a loan taken out for repairs to your home, the interest will not be deductible.

4. Equity Loan Interest Deduction. A portion of the interest that you paid on a home equity loan or line of credit can be deducted, but there is a limit set by the IRS on how much you can treat as home equity. This limit is $100,000 for a family or $50,000 per each member of the married couple, or the home’s market value.

5. Property Taxes Deduction. A large part of your monthly mortgage payments will be represented by property taxes. The amount is held into an escrow account in order to pay the property taxes yearly. You can only claim this tax deduction when the money is taken out of the escrow account and paid.

6. Private Mortgage Insurance (PMI) Deduction. When getting a mortgage loan, if your down payment is less than 20 percent, you will usually be required by your lender to pay a Private Mortgage Insurance. This type of insurance can represent a large portion of your monthly payment, and it is tax deductible, but only for those who qualify.

7. Selling Profit Deduction. Up to $250,000(or $500,000 for a married couple) of the profit that you or your family make from selling your home is tax deductible, with the condition that you have owned your property for at least 2 years and the home has been your primary residence for 2 of the past 5 years.

8. Home Office Deduction. If part of your home is used as an office, you will be able to deduct a percentage of your mortgage and utilities. There are a few requirements, in order to qualify for this deduction: your home office has to be your primary office location for your business, it must be used only for business, and its size has to be realistic.

9. Health Related Improvements Deduction. Making improvements for medical reasons to your home can be tax deducted, as long as the improvements are made for a chronically ill person.

10. Moving Expenses Deductions. If buying your home is a result of your need to relocate for work, then you might be able to deduct the cost of moving and other related costs. However, your new job must be more than 50 miles further from where your old job was.

Buying a home can provide some important benefits when the time comes to file your federal tax return. From deducting your mortgage interest, to tax deductions related to your relocation, there are a lot of areas in which you can save money, as long as you qualify and do your research.