New Homebuyer Tips: Pre-payment Discounts and Private Mortgage Insurance

So you just bought a new home or you would like to, but you’re worried about managing your mortgage payments? If this is the case you might be wondering which direction would be best for your situation.

How do mortgages work?

Before beginning, a little background might be important information for many of you. Taking out a mortgage means you are borrowing money from a company and you agreeing to pay interest. Usually you will need to make monthly payments, part of which will be going toward you monthly interest installments and another portion which goes to repay the borrowed money, also known as “principle.” Mortgage payments may include an “escrow” account, in which the company collects money from you in order to hold and use that money when you need to pay your homeowners’ insurance or property tax. Any extra money will be returned, but if there isn’t enough you’ll be asked to pay for the difference and raise the level of escrow account payments each month. If you are concerned with the amount of money in your escrow account and afraid you wont be unable to pay increased property tax consider putting extra money in now rather than worrying about the money later. If you’re not worried put more money toward principle and prepay mortgage to accumulate wealth.

Discounts for pre-payments

Make sure your mortgage company offers you discounts for pre‐payments. It is a common clerical mistake for them to forget. Pre‐payment is the best way to invest with a guaranteed rate of return equal to the mortgage interest rate. Plus getting money back is easy when you take out a home equity loan or refinance you home. Look at this example. You had a 30‐year 7% mortgage with monthly principle payments and interest of $665. You put down $1,000 toward principle next month thereby shortening your mortgage by one year. If you decide to sell the house in seven years you’ll have $1,700 more after walking away from the closing table.

Private mortgage insurance

Private Mortgage Insurance” or PMI is another consideration. A down payment of less than 20% will probably make buying PMI a necessity. PMI is an insurance policy that will pay the mortgage company if you fail to pay the loan. Reducing PMI is the first thing to eliminate. Under federal law, equity of greater than 22% keeps you from being forced to buy PMI, unless of course you are late on your payments. Make sure you monitor your funds and payments. Equity can increase in two different ways. One, by gradually paying off mortgage principle, or two, by the value of the house going up because of rising real estate prices. If you find your equity rising over 22% you may want to get in touch with you mortgage company and cancel PMI. This is a great opportunity. Payments will remain the same while mortgage begins to shrink resulting in more money for you in the long run. Also keep you eyes open for other homeowner’s insurance. You may be paying for insurance through your escrow account, but that doesn’t mean you can’t find a lower rate. Be sure you mortgage company offers you the most beneficial type of mortgage. There are different types to look for. Choose the one to your advantage. Managing your mortgage isn’t all that hard and can bring you a lot of wealth if you employ skillful operations.

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