Be sure to check the specifics of your loan-payment details to avoid overpaying.
By MSN Real Estate partner Wed 10:25 AM, 3/19/2014
Buying a home with a mortgage comes with plenty of strings attached, aside from just interest and principal.
While you’ll have a general sense as to what your monthly mortgage payment will be, this complacency likely prevents you from reading over the specifics of your mortgage statement. By simply writing a check each month and skipping over the details on your statement, you’re missing out on a variety of potential savings.
First, examine the line item “unapplied funds” on your statement and make sure the balance is zero. The reason money would be in the unapplied funds account is if you made a partial mortgage payment that didn’t cover the entire amount. For example, you might be making payments every two weeks or an extra $50 here and there with the goal of paying your mortgage off faster. If you don’t tell the bank to direct this money toward the principal, it’ll sit in the account.
“The bank can still put toward principal, even if it’s not the full payment, but you have to tell them first,” says Dani Babb, founder and CEO of The Babb Group.
Alternatively, the bank would rather put that money toward interest, which is essentially giving them free money, because interest is calculated based on the new principal amount. If you’re not making a dent in your principal, you won’t see your interest expense drop.
Next, double-check the escrow balance to see if you have an impound account. With loans, the bank adds up your insurance and taxes for the year, divides by 12 and adds this amount to your monthly mortgage payment. However, if you switch insurance companies or your property taxes change, the bank may still charge you the old amount, unless you tell the bank.
“Sometimes the mortgage company over assess and ends up owing you money,” Babb says.
Additionally, be cognizant of how much you are paying for private mortgage insurance, which typically ranges from 0.3 percent to 1.15 percent of the loan. This is charged when the loan-to-value ratio is higher than 80 percent. In other words, when you don’t make at least a 20 percent down payment on the loan, this insurance is charged to compensate the lender for taking on additional risk.
As you pay off your mortgage and should your home increase in value, your loan-to-value ratio fluctuates, sometimes falling into the threshold where private mortgage insurance is not charged. If you fail to keep an eye on this, you’ll end up paying private mortgage insurance for no reason.
“Homes appreciate much faster than the time it takes to pay down 20 percent of your loan,” Babb says. “But if you have equity, you can get the home reappraised and have the private mortgage insurance taken off.”
Finally, if you have a variable-rate mortgage, periodically check the reset date, which is when the loan’s interest rate changes from fixed to adjustable. Generally, this switch happens several years into the mortgage, but if you’re not careful, you could be blindsided by a painful payment increase.