10 Steps to Taking Control of Your Mortgage Debt

mortgage debt

Mortgage debt is probably the biggest debt you have; hopefully. My first mortgage came when I was 20 – though we technically didn’t have it until I was 21. My husband and I were engaged to be married the following year and we decided to build our starter home. It was a small, adorable little house we loved to pieces. In fact, we still own it and we rent it out. At the time, I let my husband (fiancé at the time) handle it all. He was a banker and I was a student working at a tax office. He did all the heavy lifting, I signed the papers. We built our house, put our down payment down and we had a mortgage payment every single month for $750 – including our taxes and insurance.

That was eleven years ago; and that was a huge payment for us at the time. We welcomed twins in 2014, turning our family of four into a family of six, and we knew that we couldn’t live in our three bedroom, two bath starter home anymore. That’s when we bought our dream house in foreclosure for a price that will make you cry compared to what it’s appraised for and worth right now – we got the deal of the century.

Now we have a mortgage that’s bigger, but only by a few hundred dollars thanks to our amazing deal and our significant down payment; that allowed us to control our mortgage debt. We know a lot more about mortgage debt at this point in our lives, and we didn’t want more than we needed to have. I know that many people are in the habit of putting nothing down because they can, but it’s not something we were willing to do, so we put down a big down payment and made sure we kept our mortgage low and affordable. Now that we know all about mortgage debt, we also know more about how we want to live our lives. We are a decade older, far more financially set and we know what’s important to us.

I am a firm believer that we often learn more from experience than we do by hearing it from someone else. I believe that we can talk mortgage debt all day, every day and think we understand the way that the world works when, in fact, it often takes actually having a mortgage to learn the hard lessons, as well as the easy ones.

As someone who has lived through two mortgages and currently still owns my starter home as well as my current home, let me assure you that I have learned more than I ever thought possible about the wonderful world of mortgage debt, and how to control it. If you want to take control of your mortgage debt, this is how to do it.

Do Not Buy More Than You Can Afford

Here’s the deal; the bank is going to tell you that you can afford XYZ, but you might know better. Let’s say that you qualify for a $400,000 mortgage. Now let’s say that you make $125,000 per year. Do you feel comfortable paying for that type of mortgage debt or would you feel more comfortable in the $200-$250k range?

Just because the bank says you can afford that does not mean that you can. What about insurance? What about taxes? What about home repair? What about savings? What about that new car you eventually need to purchase to make room for your expanding family, or daycare costs you might have to pay in a few years? What about all the things that you like to do, such as go out to eat, vacation and spend time shopping? The thing that you want to do is become house poor, meaning you have an amazing home and no money left over to enjoy it.

Go over your budget and figure out what you can afford while still considering the fact that you want to save, you want to be able to pay for things that might come up around the house and so on and so forth. Just because the bank tells you that you can afford something does not mean that you can afford what they are telling you. You know your financial situation and where you find yourself comfortable, so stick with that.

Buy Something Sellable

This is such an issue for some people. You have a house that you want to live in now and eventually sell for something that you can call a reasonable price, but you bought the wrong house. We have acquaintances we met through various functions that wanted several kids, but also wanted to live by the water, so they purchased a home that was quite small and had only two bedrooms and one bathroom. When it came time to welcome kids and move, they had a difficult time selling since most people want at least three bedrooms and two bathrooms.

Don’t give up your dreams, but do remember that it’s not always easy to sell a home that does not appeal to the masses. Additionally, don’t purchase or build the nicest house in the neighborhood. Sure, you want the nicest house, but not when it comes time to sell since the comps aren’t going to be where you want them to be.

For instance, let’s say you find a neighborhood in which the average house size is around 1,500 square feet and has a 3/2 plan. They’re small homes; starter homes. You’re not going to find very expensive homes in this particular neighborhood. So, it does not make any sense for you to pick up a piece of property for nothing and build a home with six bedrooms and bathrooms and 7,500 square feet of living space, does it? Those looking to buy a home of that nature don’t want a home in a neighborhood where it’s the only home like that.

Make smart decisions and watch your money grow significantly over time.

mortgage debt

Make a Down Payment

I know that it’s a tempting offer to buy a home without putting anything down, or without putting down at least 20%. However, you really shouldn’t do it. Take a little more time, save a little more money and put down the 20-30% required for a down payment, and then put down more if you can. There are so many reasons why you should put money down on a house that far outweigh keeping that money in the bank.

  • You’ll have a smaller mortgage payment that helps you minimize your risk of default
  • You’ll have more equity in your home
  • You’ll pay less interest on a smaller mortgage over the course of your loan
  • You might qualify you for a lower rate
  • You can avoid spending hundreds on PMI costs (private mortgage insurance for those who borrow more than 80% of the value of a home)

There are probably many options available for you to forgo a down payment, but don’t do it. Do yourself the biggest financial favor around and put money down on your home. It will save you so much in the long – and short – run.

Keep An Eye on Your Credit

Before you apply for a mortgage, check your credit. What if there is a mistake on your credit report that causes you not to qualify for the best rate? What if you never look at your score, but you know it’s good since you have little debt and you have never missed a payment or made a late payment on anything? You might not think to check for mistakes or inaccuracies, and you might settle for a rate that’s too high because of those mistakes.

Now, I’m not saying that there are mistakes on your report, but don’t you want to know where you stand so that you can qualify for the lowest possible rates and the best possible terms? If there is a mistake, catching it and rectifying it prior to applying for your mortgage is the best possible solution to any problems you might have. For example, it’s far easier to realize that someone at the credit bureau accidentally added something to your report or mistakenly entered something on your report before you apply for a mortgage so that you can fix it and then apply, get a great rate and then buy the house of your dreams.

Keep Your Options Open

There is one thing that will really help you take control of your mortgage debt, and that’s buying a home that is priced below its value. It’s not always something that works well with every single home buying process, but it does work well to pay less than it does to pay more. If you keep your options open and forgo assuming you have to buy a home that is perfect in every way from the start, you increase your chances of finding the perfect home for your family at the right price.

My husband and I were able to find our dream home just over a year ago. It’s the exact style home we’ve always wanted with bedrooms for all four kids, a private office for me, lots of big windows, lots of outdoor living with a wraparound front porch, a huge back deck and a beautiful lanai, plenty of bathrooms and a ton of square footage. The layout is perfect, the size is amazing and we have a corner lot on an oversized piece of property in our dream neighborhood – we also paid less than half the price the home was worth because it was a foreclosure.

Sure, our acre and a half was never cleared other than to put the house in the very back corner. Sure, our fenced in yard was a mess and you can’t see the house from either of the streets in front of it. Sure, the fence was in desperate need of repair in some places. Yes, the previous owners took everything from the kitchen sink to the toilets, but the bank put in new items. We were fortunate that they went very high-end with the stainless steel appliances, from the double oven to the range to the cooktop and everything else. They might have gone cheap with basic white carpet, and they might have used  flat matte paint on the walls that we had to repaint almost immediately since we have kids and nothing comes out of flat matte paint.

Sure, we had to get rid of the ugly formica countertops the bank put into the house and replace them with gorgeous granite, we will eventually put hardwood floors in and remove the carpet (when the twins are just a little bit older and less into shoving one another down and running and falling over and always managing to hit their heads on the floor 67 times a day) and we had to pay someone to come and completely clear our lot and then put grass on more than 50,000 square feet of land. Yes, we spent a lot of money upgrading fixtures and sinks and counters and paint, but houses smaller than ours and with smaller lots, fewer bedrooms and fewer bathrooms and fewer upgrades in our same neighborhood are currently selling for more than double.

What I’m saying is that we would never have found the house of our dreams if we were looking for perfection. It was a house that was move-in ready, but it wasn’t perfect. It’s on its way, and we love every second of it. The moral of the story is that you can save significantly if you put perfection aside and look for something that’s a hidden gem, a small project. Perfection is overrated, anyway. I’m willing to bet most homeowners make changes regardless how perfect a house appears at first.

Shop Around

Do not let this be become the time in your life you no longer actively look around. Let’s say that you have a friend who works for a bank who wants you to get your mortgage from him, but you know of another bank with lower rates; shop around. Do not feel guilty for doing so. Your financial future is at risk here, and that’s why shopping around is such a good idea. You know that the lowest rates and the best terms are far more important than not doing your research.

Pick several lenders, different banks and check to see who can offer you the most money for the lowest price. Your mortgage is something you will have for years to come, and there is no reason it should be something you spend too much money on when we all know there are much lower rates in other places at times.

Do Not Use Equity Loans for Poor Purposes

It’s a hidden danger that many people do not see when it comes time to live in their new home. You have a beautiful home, you have a lot of equity in the home and you have some things you’d like to do around the house. There is nothing wrong with an equity loan for your home if you plan on using it to add value to your home. However, when you use that money as a source of income for other purposes, it becomes problematic.

Here’s the deal; a home equity line of credit is going to help you put in those hardwood floors, remodel an outdated kitchen and upgrade your bathroom. All those things add value to your home when they are done correctly and they will balance out and earn you more money should ever decide to refinance or sell your home.

On the flip side, spending that money on a lavish vacation to Hawaii might sound like a great idea, but it’s not going to give you anything in return but jet lag and probably a week’s worth of umbrella drink bloat. Using equity for life purposes is something many people do because it’s so tempting, but at no point is it ever a good idea to owe more money on your home so that you can take a vacation or buy a new car you will now pay on for many, many more years than you would if you just bought a new car.

mortgage debt

Consider Refinancing

There is sometimes a misconception associated with refinancing a loan. There are some people who think of it as a way of saying you cannot afford your home anymore, but that could not be further from the truth. In fact, refinancing means you are simply making your home that much more affordable, and that much more of a reasonable asset.

Anytime you have the opportunity to refinance at a lower rate, do so. However, do not extend the life of your mortgage so that you are once again paying it for another 30 years. Yes, this makes a huge difference in the amount you pay monthly, but it also means you’ll pay more over time in terms of interest since you’re adding more years to your loan.

For example, let’s say you have a mortgage that is originally for 30 years. You have paid 10 years of that loan and want to refinance at a rate that’s a percent lower than your current rate. It only makes sense to do this if you refinance for the lower rate for the same amount of time – 20 more years. If you go ahead and refinance for 30 more years, you’re actually paying that rate for 20 years instead of 20, which adds more interest to your home. After all, you’ve already paid 10 years worth of interest, so why pay another 30 after that?

Make an Additional Payment Every Year

It doesn’t sound like much, does it? However, making an additional payment every year on your mortgage puts you in a place where you are managing your mortgage debt in a way that makes you feel as if you are winning all the way around. One additional payment; that’s all. Not only do you then get to deduct that as a mortgage interest expense when you file your income taxes at the beginning of the year, you also get to live life a bit more financially free a lot faster. Just paying one additional payment every year helps you pay off your mortgage years faster, which is tens of thousands of dollars in interest saved over the course of your loan.

For example, a $200,000 mortgage with a 6.5% interest rate will pay a grand total of just over $455,000 over the course of a 30 year mortgage. Make one additional mortgage payment each year and you will pay off your loan six years faster and for a grand total of just over $399,000. That’s more than $56,000 in savings all together. Now do you see just how well you can get ahead of your mortgage doing that?

Round Your Mortgage Payment Up

This is something we always do in our house. It doesn’t seem like much at all, but it makes a huge difference in the amount we will pay in the long run. Our monthly mortgage payment is $1,017, so we round it up to the nearest hundred and just pay $1,100. That, combined with our additional payment every year and we are looking at paying off our mortgage years and years faster and with tens of thousands of dollars in savings over the course of our loan.

To gain control of mortgage debt, it is often the littlest things that you can do that make the biggest difference. For us, it’s paying more every month and one additional payment every year. We also gained control of our mortgage debt by purchasing a home that was in foreclosure and selling for far less than it was worth as well as putting a large down payment on our home. We just happened to be the luckiest people that ever lived to find it the day it hit the market and put in an offer that was accepted right away. Pay a little more, make wise decisions, and always put down money on a home purchase.

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